Sunday, January 19, 2014

The Great Interregnum: Hillary and the mountain of gold

Perhaps I'm alone on this one, but hear me out on a theory. We are not living in the most interesting times imaginable. Things were more exciting and vibrant in the past, and will be so again. We are currently waiting out in an interregnum, a middle ages, like the movie Hobbit: The Desolation of Smaug - the second film of a manufactured trilogy which didn't have enough going on to merit three separate stories.

Every such narrative trilogy begins with an origin story. From an economic point of view, the current interregnum started with governments in America under George W. Bush and Australia under Howard instituting massive tax cuts for the wealthy. This created a structural deficit in the public books, which was hidden for a time by economic bubbles: America with their housing bubble that catalysed the Global Financial Crisis, and Australia with the resources bubble mainly caused by China's historic government stimulus. America has been able to recover somewhat due to currency devaluation and temporary nationalisation of strategic firms which allowed their manufacturing and financial sectors to survive, albeit their recovery is still hamstrung by fiscal austerity imposed by Republicans in Congress. Australia was saved from any recession at all due to fiscal stimulus, but saw its currency gain value to the point where every industry except resources came under massive export pressure, which is only now easing slightly. 

The structural deficit is now exposed in both countries, as both are back to something like historical trend GDP growth, but tax revenue does not cover government expenses. As a percentage of GDP, it is revenue which is lagging on historical measures, not expenses. The right's agenda is, as always, to dismantle the welfare state, but government spending levels had been perfectly affordable before Bush and Howard had slashed taxes, and would be again now if those tax cuts were all rolled back.

Inequality has risen across many Western countries (including Australia) since the advent of Reaganomics in the 1980s. It has risen so alarmingly now that the richest 1% are becoming a factor in the weakness of economic recovery, in that their income is saved more often than that of the poor, thus representing yet another reason why demand is depressed. 

The 1% are the dragon Smaug in this scenario; the ancient evil sitting on top of the mountain of gold and guarding it with fiery jealousy, while the poor folk of the countryside suffer with mere memories of how good things used to be. They are the apotheosis of the baby boomer generation, the demographic bulge passing ever so slowly on to the other side, soaking up wealth through its bloated power sources as it has done all its life.

What is their weakness, the chink in their armour, whose discovery will allow the third part of our story to begin, so that the golden mountain can be redistributed to kickstart demand once again and this interregnum can finally be done with? If anyone knows, it is the person who is most likely to play Bard the Bowman in our tale: Hillary Clinton. She looms as the hero of the third act of this morality play, if not the entire Third Age. What better candidate to conquer a mountain than a Hillary? Her accession to the US presidency in 2016 seems assured, as the Republicans flounder about like beached whales, bro. The rest of the Democratic Party seems like supporting characters in her own personal return-of-the-queen destiny. With husband Bill running economic policy - hopefully you remember how good that was the first time around - the Hillary administration could be the climax to the lull we are currently experiencing.

Before that, though, comes a little thing called the Battle of the Five Armies, as the remaining players squabble over ownership of the monty haul. Hopefully that's not a literal analogy!


  1. M0nty,

    We are not back to trend growth yet.
    Nominal GDP growth which is the MOST important detail to examine is currently around 3% and is expected to be there for a few years.

    This is around HALF the normal nominal GDP rate and while it stays here the budget ain't going into the black

  2. I am not sure nominal GDP rate is the primary statistic to use, Homer.

  3. It is for the budget and for most other indicators.
    Remember we are affected by Nominal GDP not real GDP.

    In normal times they go around together but these have not been normal times.

    When you have real GDP being larger than nominal GDP as it was it is having an impact.
    By the way I have highlighted your 'ahem' discussion with Sinclair on stagflation today