By Anatole Kaletsky
Nov 23 Economic optimism is now official. The
year ahead could be "a very good one for the American economy,"
Ben Bernanke, the chairman of the Federal Reserve, declared on
Tuesday. If he turns out to be right, these words could probably
be applied to the world economy as a whole.
Since Bernanke, even more than other central bankers, has
spent the past four years warning of perils such as the "fiscal
cliff" and the dismal condition of the U.S. labor market, this
statement, delivered in the carefully worded peroration of a
speech to the prestigious Economic Club of New York, marks an
important turning point.
Not because Bernanke has a crystal ball that offers him
economic clairvoyance. But because his views have an enormous
impact on business and financial sentiment around the world. And
sentiment - especially about government policies - is the
biggest problem for the world economy today.
In terms of objective economic and financial conditions, the
end of this year looks like a turning point in the slow recovery
from the global financial crisis. Outside the euro zone, which
now accounts for just 17 percent of global output and will
shrink to just 9 percent by 2060 according to the Organization
of Economic Co-operation and Development, economic statistics
are clearly improving.
Unemployment, though still high, is steadily falling. Banks
are now adequately capitalized. Property prices have stabilized,
stock markets are rising and credit conditions have returned
more or less to normal. For much of this year, the main obstacle
to hiring and investment decisions, according to many business
surveys, has been uncertainty about politics and monetary
policy. That uncertainty is almost over.
This may sound preposterous. After all, businesses and
financiers have been obsessed all year with the euro crisis or
speculation about Fed monetary policy or the U.S. presidential
election or China's surprisingly chaotic leadership transition -
and now the prospect that the United States will fall off a
fiscal cliff, dragging down the whole world economy.
But that is the point. Political uncertainties have been
resolved or dramatically improved in all the most important
economies. Yet business sentiment is so negative that almost
nobody believes this.
Consider what is happening around the world - with the
glaring exception of the Middle East, where war and political
chaos is unfortunately quite normal. China has belatedly
anointed its new leadership, which should end the paralysis in
economic policy and ensure that the country's gradual adjustment
to a slower growth does not deteriorate into an economic
collapse. In Europe, the crisis has certainly not ended, but
German Chancellor Angela Merkel's decision to back unlimited ECB
bailouts and to keep Greece within the euro, essentially
guarantees that the euro will not disintegrate, nor the banking
system suffer a Lehman-style meltdown. At least until next
October's German elections.
Best of all, the uncertainty about U.S. politics and
monetary policy, which have preoccupied businesses and investors
this year to the exclusion of almost all other issues, is about
Bernanke made clear on Tuesday that his optimism about the
economic outlook depended entirely on the assumption that
Congress would ultimately back away from suicidal legislation
that would deliberately push the U.S. economy over a fiscal
cliff on January 1. The bad news is that a plausible deal to
avert this self-inflicted catastrophe has not yet been outlined.
Fear of another Lehman-style financial crisis therefore quite
reasonably restrains business decisions around the world.
But the good news is that this uncertainty is almost over.
By New Year's Day, 2013, Congress and President Barack Obama
will have chosen one of two options. The first is to
deliberately sabotage their nation - in which case the world
will be back to economic Armageddon. The second will be to tear
up the fiscal suicide pact.
As long as Washington decides to avoid fiscal suicide, it
hardly matters how. The best outcome would be to agree on broad
outlines of long-term fiscal consolidation, while avoiding any
spending cuts or tax hikes in 2013. The alternative would be
merely to "kick the can down the road" by extending today's
fiscal legislation and increasing the Treasury's borrowing
powers. This is not ideal, but investors and business leaders
could live with it.
The Fed would then continue financing Washington's deficits
at near-zero interest rates for another two or three years, as
explained last week in this column - and as Bernanke has now
promised again. The long-term problems of demographics and
healthcare costs would then have to be addressed in the next
election cycle, after 2016.
Whichever option Washington chooses, the current uncertainty
about U.S. fiscal policy will, for better or worse, be resolved
by January 1. Assuming the fiscal cliff is averted, investors
and businesses around the globe will have lost their main
excuses for avoiding decisions.
When they look at Europe, they will see a continental
economy in recession, but no longer close to a Lehman-style
financial shock. In China, the new leadership is now in a
position to act, if necessary, against risks of the economic
slowdown getting out of hand. In the United States, monetary
policy is now fixed until 2014 and the presidential election is
out of the way.
Business leaders may like Obama or hate him. They may agree
with Fed policy or disapprove. But there is no longer any point
in delaying business decisions until after the next Fed meeting,
or until healthcare reform is abandoned or until a new president
with new policies is inaugurated next year.
That leaves the fiscal cliff as the only serious policy
uncertainty to fret about.
Assuming that Washington decides not to commit economic
suicide on January 1, the business obsession with politics will
then have nothing left to feed on. Business leaders and
investors will be forced to redirect their attention to
economics and the financial fundamentals of their businesses.
They may be pleasantly surprised. Once this political
uncertainty is neutralized, prospects for most of the world
economy look pretty good.