Barack Obama has won the U.S. presidential election in convincing fashion. While I am clearly not a liberal nor a Democrat, I am pleased with the election’s outcome. It signals a new beginning – a new era in American politics and in American society that is much needed.
A generation ago, in 1980, it was much the same. Americans looked back on the recent past and saw shame and defeat. We had seen a collapse in the value of the U.S. dollar, an end to the Gold standard, very high inflation, an end to energy independence. We witnessed the shameful resignation of the US. President, an ignominious retreat from Vietnam, the beginning of government deficit spending, the collapse of many an American city, and a humiliating hostage crisis in Iran. The 1970s were a lost decade.
The United States had been the most powerful country in the world at the end of World War II. Europe was in shambles, Asia was prostrate after a decade of fighting, and Latin America and Africa were not large economic factors. The United States had unrivaled power economically, politically, and militarily. Yet, in thirty years it all seemed lost.
America wanted change. Into this void stepped Ronald Reagan and his supply-side revolution of deregulation, limited government and lower taxes. Over the next quarter century, America was guided by a market-based, laissez-faire philosophy which proved spectacularly beneficial to many. Our stock market went from 800 to over 14,000. Our bond markets sky rocketed as interest rates decreased from well over 15% to as low as 1%. And the overall health of many cities improved if you witness places like Washington, DC, Baltimore or New York. For many, this was golden era.
However, underneath the apparent successes of the market-based approach lay a burgeoning debt burden and macroeconomic disequilibria which have proved the Achilles heel of this golden era. Policy makers failed to recognize the very real threat of human nature’s tendency to go to excess in their support of laissez-faire reforms. A market-based approach must be accompanied by oversight, regulation and vigilance in order to succeed.
I have been particularly critical of the monetary stewardship of Alan Greenspan and the latter day laissez-faire policies we followed despite these looming problems. Last month, I wrote:
The United States had been living beyond its means for a very long time before the credit crisis finally hit. The truth of the matter is that U.S. monetary and fiscal policy rewarded risk-taking and leverage at the expense of prudence and saving.
The goal of government it seemed was to avoid the pain of recession and keep the economy growing at all times. Every time the U.S. economy would hit a stumbling block, the Federal Reserve would lower interest rates and flood the economy with money. Market participants learned to trust in the Greenspan Put — an understanding that they would be bailed out by Fed policy at the first signs of trouble.
This irresponsible monetary stewardship seemed to work wonders as GDP in the U.S. continued to rise year after year. Yet, large macro imbalances increased steadily year after year. Foremost among critics of U.S. monetary and fiscal policy was Stephen Roach, Morgan Stanley’s former Chief Economist and now head of Morgan Stanley Asia. He has been warning since the bust of the Tech Bubble that “global re-balancing” needed to occur, whereby the overextended U.S. consumer passed the reigns as motor of the global economy to consumers in China, India or Japan and Europe (see article).
Below are a number of charts that I have compiled which should make abundantly clear what the disequilibria were and how large they had become. Presently, this re-balancing is being forced upon us by a deep recession. It is unfortunate we could not have had the foresight to avoid the worst of things by taking corrective action earlier, particularly after the tech bubble in 2001.
History books will look on this period of U.S. history as one dominated by hubris, where fiscal and monetary policy were particularly reckless, leading the United States into a long period of decline.
–Charts of the day: U.S. macro disequilibria
So, here we are in the year 2008, having just elected a bi-racial man named Barack Hussein Obama with roots in Kenya, Kansas and Hawaii to be the next President. Quite frankly, it is a bit of a leap of faith for America. But, I am encouraged to see Americans take that leap. I am encouraged because it suggests that America is a nation that is now still more hopeful than fearful. And that is a very important distinction as we face some very daunting tasks ahead.
Let’s see where this journey takes us.