We Were All Losers On Election Day

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On Wednesday the Bank of England halted its quantitative easing program. The bank's board decided that with inflation remaining "stickier" than previously believed (currently estimated by official statistics at 2.2%) and some temporary and one-time improvements in the economy that enough QE had been put out into the financial system. There were also indications that the bank may want to put more emphasis on its Funding for Lending Scheme (FLS) in which the Old Lady of Threadneedle Street is attempting to cheapen loans to small businesses and households by subsidizing the wholesale funding costs of banks that have signed onto the program. The idea is that banks then pass on interest rate savings to new borrowers.

In the United States, in this new age of unlimited QE which contrasts rather sharply with a Bank of England that is often the philosophical and operational forerunner for the Federal Reserve, monetary policy has been lashed tightly to the housing recovery. In Chairman Bernanke's new houses-for-jobs approach, the Federal Reserve will be subsidizing the nascent mortgage rebound by purchasing packaged loans through the GSE's. This is intended to, as with the FLS, reduce the cost of borrowing for potential US mortgage obligors.

Not to be outdone, the European Central Bank has promised open-ended buying of peripheral sovereign bonds to ensure that government borrowing costs remain reasonable. Part of the reasoning here is that market perceptions of riskiness have shut out peripheral nation borrowers from the "stimulus" of ECB interest rate policies. ECB Chair Mario Draghi indicated this week that he still sees German interest rates as too low, and by implication PIIGS rates too high. He is concerned that the depressions entrenched in the periphery are not being alleviated or resolved by the ability of those depressed agents to fully borrow at subsidized lending costs.

In different ways, each of these central banks is addressing the same problem - broken transmission mechanisms. In doing so, however, there is little measure taken to fully encompass or unravel the mystery of why each has to resort to such unconventional means to do what theory holds as unquestionably the right thing to do. Because of that operative theory, the only answer to every economic problem is the "stimulus" of debt, debt and more debt.

The world's central banks, often in concert with one another on liquidity and seemingly at odds over currency crosses, seek to further encumber the world's stock of households and workers. It is clear and even admitted that the general public in each of these jurisdictions is constrained by a lack of wage income and job opportunities, so in some ways the appeal to a spending supplement seems reasonable. But reasonableness is a funny and fuzzy concept when trying to cajole members of the public to financially imperil themselves for the "good" of the system.

Here in the United States, much of the recently concluded election centered on this ongoing lack of a real recovery. To that end, Mitt Romney's case fundamentally rested on the fact that 42 months after the official end of the Great Recession Ben Bernanke is still running QE programs on top of what will be at least seven years of zero interest rates (ZIRP). There is an intuitive disconnect there that seems incalculable in the professional economic class but that is well perceived and understood by the general public. For his part, Mr. Romney simply assumed that showing up and pointing out the lack of recovery would be enough. His unspoken campaign slogan consisted of "Barack Obama was president during the worst recovery on record and I was not."

Romney was defeated in a setup that begged and even demanded change. Speaking to just how badly that strategy was, he did not even receive as many votes as John McCain did four years ago. For the president's part, he had to make due with an absolutely astounding 10 million fewer votes. I understand that there is no direct translation here in terms of the Electoral College (since the vote for president is really 50 separate state votes for electors), but it cannot be understated the significance of so many American voters sitting home on Election Day - an estimated 13 million fewer presidential votes in total - with so much urgency and angst surrounding it and penetrating the political contest at nearly every level.

I certainly do not want to delve into the political matters of the day, nor into the politics of presidential election, but to my uninformed and biased (in matters of economics) opinion so many of those potential voters who chose not to select either candidate represent the ethos of our current predicament. Clearly, these were far more proportionally disenchanted previous Obama voters, but it should not be discounted how many potential Republican voters sat this one out as well.

To me it is as clear as day that neither candidate offered a real choice on the primary economic affliction: debt. There was almost no campaigning on either side about the potentially ruinous fiscal profligacy only one year after the historic downgrade and debt ceiling embarrassment. Mr. Romney seems to have calculated that the simple nomination of a noted budget expert in Paul Ryan was enough of a nod toward fiscal seriousness, so he never campaigned on the issue again. Mr. Ryan was practically invisible and his prowess on budget matters was never given the prominence that was deserved given current circumstances.

The federal deficit remains a problem for future generations only so long as Mr. Bernanke keeps ZIRP in place. Foreign demand for US debt, at current prices, has declined noticeably in the past eighteen months, particularly in longer-dated coupon bonds. Under the cover of monetary "stimulus" the threat of rising interest rates remains subdued, but that does not mean it has been mitigated in any way. Indeed, the day the QE's end is with all certainty the day that the debt is a disaster for current generations. That day may actually be closer should confidence continue to erode in more than just foreign credit investors.

Neither candidate offered a choice as to whether it is wise to continue to monetize the choking fiscal deficit. And in that lack of choice, voters, particularly those fed up with the lack of recovery, were not given a choice about debt. Mr. Romney indicated he would not reappoint Chairman Bernanke, but mentioned monetary matters very little thereafter and without much outward conviction. It was hard to take his promise of rethinking monetary policy seriously without the strong backing of actually taking the time and effort to make it a primary campaign issue (having Glenn Hubbard as a chief economic advisor simply sealed that mistrust).

Romney's strategy seemed to be that dissatisfaction with the economy would simply bleed into disaffection for Mr. Obama, and by default establish his own case. He was only half right. Closing the deal would have meant actually explaining the weak recovery and offering a plausible alternative to the current monetary and fiscal setup. But Mr. Romney was never the candidate to make that case, either. He was the governor that first instituted state-run health care. He was a former Wall Street insider.

Monetary policy through debt in this modern system is entirely captured by Wall Street investment banking. Marginal credit comes not from traditional depository banking, but through wholesale money. The entire growing and rotting federal edifice has been propped up by a banking system that not only favors government debt (Basel rules), but only profits through volatility and flow rather than actual, successful intermediation. Wall Street needs monetary debasement to maintain its profit stream, which aligns it very closely with the monetary policy of Mr. Bernanke and the bulging federal spending imbalance.

Shutting down the cycle of debt, or even promising to kick the mortal habit, may have seemed disingenuous had Romney even tried to make the case, but that was no excuse not to try. That it was never an issue during the campaign (we used to hear about "too big to fail" in the past) was, again, a fatal lost opportunity. He simply never made the effort to explain why and how "too big to fail", ZIRP, and the federal deficit are all really different facets of the same issue. That would have cut a clear path right to the heart of the issue he was actually trying to backdoor - the weak recovery.

Both parties are, particularly in the "elite", captured by orthodox economics that rolls Keynes' government approach together with central bank micromanagement of economic variables. Neither political party offered any real contrast in the sort of recovery plans that might be enacted, and that is still the case now. Democrats wanted and got a government spending binge, and it was only a year ago that President Obama was angling for another. Republicans, at the elite level, were more than happy to defer to Ben Bernanke as if dominating credit markets and interfering with asset prices was at all consistent with free capitalism. These may seem like divergent approaches, but they are both orthodox solutions to what is purported to be a shortage of aggregate demand. In other words, the only political options for the voting public were to choose between different means to achieve the same goal - debt-based activity. The current political leadership on both sides offers no other course than continued encumbrance, and in the end it does not matter if that debt runs through the public or private sectors.

What makes this situation untenable and dire is that both sides appeal, implicitly and explicitly, to finance and subsidize the ubiquitous debt and borrowing through the central bank. Both political parties have essentially closed their minds to the possibilities of anything other than debt as a solution, and by doing so I believe the Republicans closed themselves to those 13 million voters who might have made all the difference. These are the very voters who are likely impacted by ZIRP as it forces savers to subsidize investment/wholesale banks in their quest for volatility and flow. These are the very voters who have dropped out of the labor force because past and present pursuits of aggregate demand distorts the course of normal economic functions so much that the adjustments that must be made to return to a natural and steady state of economic order (one predicated on actual jobs and wages instead of credit) are immense and painful. Neither candidate appealed to these voters because there is no political separation on these economic issues since they both appeal to slightly different interpretations of what is really statism. Free markets had no champion.

As is so often the case now, certain segments of the Republican Party reflexively defend Wall Street as a vital element of economic growth and the even the very heart of free market capitalism. Wall Street might have been that at one time in our history (even that is arguable), but we are well past that now. Wholesale banking in the age of interest rate targeting is a tool of modern central planning, the means by which the central bank implements its designs for more and more debt and encumbrance. Free markets are those that freely allocate scarce resources due to the unfettered price discovery of sustainable and profitable opportunities. Free market capitalism is the free flow of money to profitable ventures born out of real intermediation.

Aggregate demand is the generic push of money for the sake of money. A recovery does not need just money or credit, it needs the right mix of money to the right people. There should be purpose to the circulation of funds, as additional value is added at each step of the free circulation process. The first stimulus in the Great Recession era was President Bush's tax credit "gift". It failed to have much impact because the economy does not need money in everyone's hands, it needs money in the hands of certain people that have good ideas about how to unlock value and wealth, people that understand how to turn money into sustainable enterprises that grow and lift up the rest of the economic system. Money needs to discern between good, sustainable ideas and bad ideas that waste resources and set back the economic clock. Haphazardly dispersing money without any concern for merit or value is the latter.

Generic money and credit, the current Wall Street drag of volatility and endless flow, fails because there is no discernment toward real economic impacts, the function of intermediation that used to be carried out by banks. A recovery based on mindless, meaningless money is itself mindless and meaningless, a listless and volatile swirl of running in place (at best). There are no markers for value and growing wealth upon which the economy can establish a meaningful and, more importantly, sustainable growth trend.

Neither Romney nor Obama offered any chance to replace meaningless money, and all the debt and deficits, with something actually productive. There were a lot of throw-away platitudes about creating jobs or continuing the recovery as it has been, but because there was no emphasis on monetary matters there was no daylight between them in any meaningful sense on economic matters. Wall Street was never an issue any more than aggregate demand or how the Fed is underwriting our collective fiscal ruin.

The debts of our society have already begun to sink us. That process started in 2007 and it remains largely unresolved five full years later. It is clear, at least in my sense of the political diaspora, that Mr. Romney lost the election because he did not make the economic case that needed to be made. We did not need him to tell us the economy is bad, we needed him to connect the dots between that dire debt position (public and private), the process by which it was made and is now sustained and given political cover, and the recovery that would finally arrive should this untenable imbalance ever get successfully resolved. By drawing a line from the White House to the US treasury to the Marriner Eccles building to Wall Street voters might have been more open to him since it would have at least conveyed an understanding of where it all fails - from understanding comes a reasonable expectation for action. It would have resonated with the disenchanted populace because they already know it.

The popular resentment toward this New York/Washington nexus actually cuts across party lines and unites seemingly disparate American factions (the Tea Party and the Occupy Wall Street crowd both have deep distrust and dissatisfaction with this monetary/financial domination). This is not about rich vs. poor. It is about merit and meaning; Wall Street succeeds on the backs of savers and through direct monetary connections to the Federal Reserve. Investment banks need not create real economic value to be successful, they only need to exist within the central bank orbit and capture unearned flow. We actually need many more rich people in this country, except we need the kind of successfully wealthy that make money through building businesses and not through trading paper units. It would have made a very effective counterpunch to any of the numerous allusions and appeals to class warfare, yet, again, Mr. Romney was particularly ill-suited to deliver it.

The one issue that needed prime treatment and hard fought campaigning is the one issue that never saw the light of day. Having disappointed so many voters by not even addressing it, can anyone really be surprised that turnout was so low, and on both sides? Though Romney clearly lost and Obama remains in the White House essentially by forfeit, nobody but the apparently uninterruptable processes of volatility and flow can actually claim a victory.


Jeffrey Snider is the Chief Investment Strategist of Alhambra Investment Partners, a registered investment advisor. 

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