Won't Get Fooled Again?
The end game of politics is to be elected (at least in democracies; the technique amongst totalitarians is somewhat different, although, frankly, the aim – power – is the same). So the fact that it is highly unusual for economic cycles to conform to political ones is a problem; Bill Clinton was probably right about “the economy, stupid” when he was pressed about what interested voters; we all – broadly – vote with a strong glance at the contents of our wallets and bank accounts and a check of what the candidates are threatening to do to them. The political term in the UK is five years, in the US four and elsewhere of differing, though similar, periods of time. Stubbornly, the waves of the economic cycle refuse to go along with those artificial constructs, with the result that some politicians are very lucky, surfing on a wave of positive development and growth. Others, sadly for them, are on the receiving end of the opposite wave.
Present, not Future
Now, if you accept my first premise – that power is the politicians’ objective – it’s not a huge step to arrive at the conclusion that in fact most of the policies they embrace are designed to benefit the present at the expense of the future. In other words, making the current situation look good is more important to them than what happens in the future. Effectively, in terms we are familiar with, cash flow trumps profitability. (Incidentally, I always remember a trader telling me years ago that month on month his copper trading produced a positive cash flow, so why was his employer concerned about what he was doing? When I looked a bit more closely, what he said was true, but what he omitted to mention were the historic price carries that moved the real position into the future; that’s why his employer – correctly – was concerned. For the benefit of younger readers, there was a time when historic price carries were not the pariah they are – rightly – today.) In a nutshell, I think that sums up the attitude of most politicians in office, and I’m sorry if that sounds cynical; however, the self-enriching post-office behaviour of some – yes, you, Blair and Clinton, for example – I think makes my point; personal gain is the driver.
So, then, we can look at the QE policies followed since the crisis in that light; less a way of resolving economic problems than as a way of shifting them forward so that they didn’t stain reputations. Viewed like that, you’d have to say they had had a fair degree of success. It’s not a question of liking or approving of the policies followed, but according to their own lights, they have been successful. Growth has returned in the UK and the US, the Eurozone has – almost unbelievably – held together and politicians are giving themselves small, surreptitious pats on the back.
But there is always a price to pay; not facing problems immediately very often leads to them becoming greater and more threatening in the future. I’m sure all the traders reading this will remember that at some point very early in their career they were told that it’s always cheapest to take the first loss, rather then to hold on in the hope of an improvement that rarely comes – most will probably agree with that. So the steps taken over recent years are almost certainly building problems for the future – debt not resolved now will inevitably be bigger debt down the line. The debt hawks are convinced it will lead to catastrophe, the doves suggest (although perhaps not explicitly in these terms) that you can keep pushing it forward and economic growth will take care of it. The moral argument – that it’s broadly wrong to load the debt for your own life onto future generations is, I would suggest, incontestable.
But despite the illusion, the reality, given the lack of synchronicity between political and economic cycles, is different; short-term, personal advantage dictates taking the other course, rather than the moral one, which is pushed into the background. This is not a particularly profound statement, but will we be fooled again? Or is the truth – uncomfortable in such bald terms – that actually, we all want to be fooled again; that we share with the politicians the view that all we care about is that the little bit of the cycle we live through should be an upwards bit, and let the future take care of itself? That would be a depressing thought.