Mon, Nov 26, 2012 - Page 9 News List

Economic optimism is now official

Assuming that Washington decides not to commit economic suicide, big business’ obsession with politics will have nothing left to feed on next year and leaders will be forced to redirect their attention to the financial fundamentals of their businesses

By Anatole Kaletsky  /  Reuters

However, the good news is that this uncertainty is almost over. By New Year’s Day, Congress and US President Barack Obama will have chosen one of two options. The first is to deliberately sabotage their nation — in which case the world would be back to economic Armageddon — the second is 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 increases next year. The alternative would be merely to “kick the can down the road” by extending today’s fiscal legislation and increasing the US Department of 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 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 US fiscal policy will, for better or worse, be resolved by Jan. 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 US, 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 Jan. 1, big 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.

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