Saturday, 31 July 2010

Can't get rid of Kevin - Coalition wins again

As a rough rule the ABC and the commercial television networks tend to give each side equal time on their news bulletins which is why the parties work so hard at devising photogenic events that will tell a story they want told. Which is all very good in theory but it only works if there is virtually no alternative to showing the day's party line. Unfortunately for Julia Gillard, the Labor leader, Kevin Rudd has been a major distraction on many days this week that the journalists find far more interesting than anything she has to say.
Yesterday at the start it was not anything that Kevin was quoted as saying but a story in the Sydney Morning Herald saying he had to been asked to take a more important role in a wavering campaign. Not as vicious a background briefing as the one earlier in the week but Ms Gillard felt obliged to comment that she knew nothing of it. Then, after being rushed off to hospital for a gall bladder operation, Mr Rudd. through his spokesman, struck again with some words that made Ms Gillard look a bit stupid. Yes, when Kevin got out of the hospital he was looking forward to campaigning outside his own electorate to help his colleagues get a Gillard government elected. Pretty small beer of a story under normal conditions but sufficient to take away that valuable television time from the things Labor had hoped to be seen talking about.
The upshot was another clear campaigning win for the Coalition and with this morning's newspapers featuring an opinion poll showing that Labor was now behind the Crikey Election Indicator moved again in the Coalition;s favour.

Niall Ferguson as ‘poseur’: the case for the prosecution from "Though Cowards Flinch"

Another interesting piece about the skills of Niall Ferguson's as an interpreter of economic history, this time from the Though Cowards Flinch website. It puts the debate between Paul Krugman and Ferguson into this context: If the Ferguson camp can make him into the leading public figure economist on both sides of the Atlantic, conservative fiscal policy will win the battle of economic policy, and the future will be grim for millions. It’s that serious.
The whole article titled Niall Ferguson as ‘poseur’: the case for the prosecution is worth the read. This particular extract follows nicely from my earlier post this week on the flexibility of the Ferguson views:
In the Los Angeles Times in October 2005, Ferguson stated:
‘Parties out of power usually tell themselves that sooner or later the incumbent will be tripped up by the economy. That was indeed the pattern throughout the 20th century. Yet this is to overlook four things.
First, economic volatility has declined markedly since the 1970s. In all the G7 industrialized countries, annual growth rates vary much less than they used to. So do inflation rates. Recessions are happening less often, and when they do, they are not too steep and not too protracted’ (my emphasis).
But here is what you said in Vanity Fair in January 2009 (yes, Vanity Fair), in an interview to publicise his new book, and in which he refer to a period very shortly after the appearance of Los Angeles Times article:
‘Well, I can say with a degree of self-satisfaction that it wasn’t luck. Two and a half years ago I decided to write this book, because I was sure that this financial crisis was going to happen, and the reason I was sure was because people kept coming up to me—whether it was investment bankers or hedge fund managers—telling me that volatility was dead that there would never be another recession. I just thought, ‘These people have completely disconnected from reality, and financial history is going to come back and bite them in the ass’ (my emphasis).
Like bollox he thought the financial crisis was going to happen! And that’s exactly why the book he refers to, ‘The Ascent of Money’, reads like one book praising to the heights the growth of financial innovation that led us to the mess we’re in, sandwiched between two hurriedly scribbled chapters telling us the story of what we already know.

A cartoon to put television political reporting in context

At the risk of offending Laurie:
Public Opinion
From the excellent xkcd website

An oddball candidate

I'm sure that in the list of candidates for the Australian election of 21 August there are some pretty odd ball people but I wonder if any can compare with former Marine, Basil Marceaux who is running dead last in a four-way race for Tennessee's GOP gubernatorial nomination.
Yahoo News reports that last week, as they have done with the other candidates, a Chattanooga TV station gave Marceaux a few minutes on air to pitch hiscampaign platform, which includes planting grass on vacant lots to "sell it for gas" and a plan "to stop traffic stops." He may or may not have been drunk.
Judge for yourself
The Yahoo report commented:
Marceaux is running at just 1 percent in the polls, according to the Chattanooga Times Free Press. But he's getting way more attention than his rivals, including Reps. Zach Wamp, who has suggested that Tennesseeshould secede from the union, and Ron Ramsey, who has questioned whether Islam is really a religion. Come to think of it, maybe Marceaux isn't that weird after all.

Change the names and perhaps he's describing Australia

From NY Times columnist Paul Krugman this week:

Why does the Obama administration keep looking for love in all the wrong places? Why does it go out of its way to alienate its friends, while wooing people who will never waver in their hatred? ...
The point is that Mr. Obama’s attempts to avoid confrontation have been counterproductive. His opponents remain filled with a passionate intensity, while his supporters, having received no respect, lack all conviction. ...
Just to be clear, progressives would be foolish to sit out this election: Mr. Obama may not be the politician of their dreams, but his enemies are definitely the stuff of their nightmares. But Mr. Obama has a responsibility, too. He can’t expect strong support from people his administration keeps ignoring and insulting.

Friday, 30 July 2010

A blatant courting of popularity

Having noted that reality television is much more popular than political television I am stooping to expand the scope of the Crikey Election Indicators to encompass the next big ratings hit -- Dancing with the Stars.
30-07-2010 dancingwiththestarsindicator

An honourable man

You can choose your own Brutus, Marc Anthony and Caesar in the current Australian political play called Kevin Rudd is an honourable man. I suppose it is one of those occasions where, if the cap fits, wear it.
I come to bury Caesar, not to praise him.
The evil that men do lives after them;
The good is oft interred with their bones;
So let it be with Caesar. The noble Brutus
Hath told you Caesar was ambitious:
If it were so, it was a grievous fault,
And grievously hath Caesar answer'd it.
Here, under leave of Brutus and the rest--
For Brutus is an honourable man;
So are they all, all honourable men--
Come I to speak in Caesar's funeral.
He was my friend, faithful and just to me:
But Brutus says he was ambitious;
And Brutus is an honourable man.
He hath brought many captives home to Rome
Whose ransoms did the general coffers fill:
Did this in Caesar seem ambitious?
When that the poor have cried, Caesar hath wept:
Ambition should be made of sterner stuff:
Yet Brutus says he was ambitious;
And Brutus is an honourable man.
You all did see that on the Lupercal
I thrice presented him a kingly crown,
Which he did thrice refuse: was this ambition?
Yet Brutus says he was ambitious;
And, sure, he is an honourable man.
I speak not to disprove what Brutus spoke,
But here I am to speak what I do know.
You all did love him once, not without cause:
What cause withholds you then, to mourn for him?
O judgment! thou art fled to brutish beasts,
And men have lost their reason. Bear with me;
My heart is in the coffin there with Caesar,
And I must pause till it come back to me.

Five winning days in a row for the Coalition

This is getting serious. For five days in a row by my assessment Labor has lost the media battle of words and pictures. The prime minister just cannot seem to get away from talking about Kevin Rudd -- a subject she would love to ignore.
30-07-2010 dailywinner
Yesterday Julia Gillard continued her macho woman approach by making a threatening, but completely hollow, promise to sack from a future Gillard Cabinet any minister naughty enough to leak details of a Cabinet meeting to a member of the press. It might sound wonderful but the trouble about leaks is that ministers do not put their hand up for making them and do not confess if and when confronted.
Proof of disloyalty will be hard to get unless Gillard is prepared to resort to the good old days when the Country Party's Deputy Prime Minister John McEwen called on Prime Minister Harold Holt to have ASIO tap the phone of his Cabinet rival, Treasurer Billy McMahon, to get proof that Billy really was leaking to then newsletter publisher Max Newton for whom I worked at the time.
Billy was leaking, of course. It was a highlight of my Sunday afternoons to answer the phone to hear his squeaky voice calling in to give Max a weekly Cabinet meeting update. Not from his home phone, mind you, but from a Woollahra public phone box to because the Treasurer guessed he was under surveillance.
It didn't do the McMahon career any harm either. With the retirement of Black Jack, the leaker went on to achieve his goal of becoming Prime Minister after another act of political bastardry when he led the coup against incumbent Liberal Leader John Gorton before Gorton, like Kevin Rudd, had been allowed to complete his first term after winning an election.
Perhaps Tony Abbott would like to reflect, incidentally, on that little episode before again pretending that there was something unique about the deposing of Rudd when it just followed on in the grand precedent established back then by the Liberal Party. The only difference between the two Prime Ministerial assassinations that I can see is that in the McMahon/Gorton case the party room was equally divided whereas with Gillard/Rudd it was not a contest at all because the challenger had such a clear majority of the votes.
Not that such matters are at all relevant to this continuing election campaign where the great fear of the Labor campaign brains trust must be that another embarrassing revelation will be dropped by the phantom leaker. It is perhaps because of that apprehension that the Crikey Election Indicator continues to move slightly in the Coalition's favour.
30-07-2010 crikeyelectionindicator

Thursday, 29 July 2010

Getting depressed watching television

Early today the US National Oceanic and Atmospheric Administration released its 2009 State of the Climate report drawing on data for 10 key climate indicators that all point to the same finding: the scientific evidence that our world is warming is unmistakable. More than 300 scientists from 160 research groups in 48 countries contributed to the report, which confirms that the past decade was the warmest on record and that the Earth has been growing warmer over the last 50 years.
Tonight on ABC television's 7.30 Report the spokespeople on climate change for the Government and the Coalition waffled away about who was planning to spend how much on what and how well without giving the data the merest mention. If you need a reason to be depressed about our political system and missed the program live, catch up with it on the ABC website as Penny Wong and Greg Hunt avoid any discussion of the real issues.
And when you are finished with that spare a moment to look at least at the summary of the NOAA report. These graphics partly tell the story.:

Big ear lobes DO matter


The impact of physical attractiveness on voting behaviour is not a subject the oh-so-serious commentators like to take seriously.
The tut tutting that’s followed people writing about ears in this election campaign — the size of Julia’s lobes and just the enormous size of Tony’s — is proof of that.
Yet all the evidence available on the subject suggests good looking people tend to beat ugly ones. So Julia Gillard’s wonderful picture spread in the Women’s Weekly is likely to have more impact on this election result than those pictures of a stripped Tony Abbott parading on the beach.
The contrast between her beautifully styled red hair and his considerable body hair makes it a no contest.
Now before I am condemned by outraged readers for being flippant, sexist or something even worse, I present to you the latest research on this important subject in the form of an advance copy of a papersoon to be published in that most reputable of academic journals,World Politics.29-07-2010 lookinglikeawinner
MIT News reports the appearances of politicians do indeed strongly influence voters — and that people around the world have similar ideas about what a good politician looks like. While few political observers would be surprised to learn that good looks earn votes, the MIT researchers have quantified a phenomenon more often assumed to be true than rigorously measured.
“Ever since Aristotle, people have written about the concern that charismatic leaders who speak well and look good can sway votes even if they do not share the people’s views,” acknowledges Gabriel Lenz, an associate professor in the Department of Political Science at MIT, and a co-author of the study.
The paper is an “interesting and innovative study” writes Panu Poutvaara, an economist at the University of Helsinki who also studies the influences of candidate appearances, responding to questions by email. In Poutvaara’s view, by helping to confirm the general connection between good looks and ballot-box success, the study paves the way for future research that should address precisely why voters favour good-looking candidates: “Is it because voters either enjoy watching good-looking politicians on TV, or think that they are better in social interactions?”
Lenz and his colleagues are addressing this question from a slightly different angle in additional, ongoing research. In a forthcoming study, they find that “low-information voters” are especially likely to choose candidates based on looks. “These are people who don’t know much about politics, but watch a lot of TV,” says Lenz. The researchers are currently writing a paper based on this latter project.
In the interests of furthering the research into this important subject I have sought the help of Crikey (the ones who actually pay me to write these little notes about politics) and their readers.
We have chosen candidates in eight seats to be contested in Australia on August 21 and on Crikey's special Politicians: Hot or Not? survey page we ask you to select the winner based on nothing else but the photos of the candidates from the two major parties.

The daily winner.


It was a Coalition win again but no thanks to anything the Coalition said or did. Their performances were rather lacking in lustre actually but it's hard to have a losing day when your opponents are fighting among themselves while looking for leakers.
It would have been far worse for Labor than the one point loss that I have on my score card if Julia Gillard had not given such a spirited commentary on the story of what she did and did not say in Cabinet meetings. This she said he said business does not register with casual observers anywhere near as much as it does with journalists and probably the issue has had little or no impact on likely voting behaviour.
29-07-2010 dailywinnerWhat the researchers must be finding that is having an impact is the contradiction between the Coalition criticising Labor for putting a tax on miners while themselves planning a tax rise on all businesses to finance a parental leave proposal. Tony Abbott is desperately looking for a way out of this particular "bit new tax".
29-07-2010 crikey election indicator

Now this is a knife!

No sooner did Labor turn its attention to law and order, promising to crackdown on weapons such as knives and knuckledusters if it wins the next federal election, than Tony Abbott was doing his “I can be tough on crime too” imitation.
Perhaps Home Affairs Minister Brendan O’Connor was really just reacting to a Coalition promise earlier in the week to finance a new array of security cameras in marginal electorates. Whatever the reason, the government planned on toughening weapons controls across the country in a bid to quell crime. “Under the new approach, stricter controls will be imposed on a range of weapons with no legitimate domestic or commercial use in Australia,” he promised. “For example, knuckledusters, certain items adapted for warfare, electronic shock devices and flick knives.”
Don’t you worry about that, responded Opposition leader Tony Abbott this morning. Not only would the Coalition extend the list of banned knives but it would introduce “tougher” uniform penalties for people who carry knives.
But wait. There’s more.
Extra funding for metal detectors would be made available, and — if the Coalition wins the election — there will be a national violent gangs database to track the activities of malicious groups around the country with a similarly named squad, set up under the auspices of the Australian Crime Commission, would be created to lead the fight against violent gangs.

Still where I started.

At the very beginning of this election campaign I speculated that if there were no opinion polls to guide us in a different direction, pundits such as me would be basing their assumptions about who would win the election on economic conditions and on that score would have Labor most likely.
Well since then, opinion polls aplenty have come and gone without doing anything but confuse so I’ll stick with my belief that “It’s the economy, stupid” is still the most important matter. And with the chance of a further interest rate rise having gone with yesterday’s inflation numbers the economic outlook is benign enough to suggest that a majority of people will not be angry enough with this government to actually throw it out.
29-07-2010 interestrateindicator
The market now has no change as an 87% chance

A welcome bit of passion but …

Wonderful to see the redhead firing up a little at her press conference yesterday but it would be nice if the new-found passion extended to a few matters of policy too. All the politicians seem to be getting excited about in this campaign is telling us what they will not be doing rather than what they will be doing.

Wednesday, 28 July 2010

What about me?


Some glorious and delightful examples this morning of the ingratitude and jealousy that can strike a political party when it gets the parish pump working during an election campaign. In a blatant attempt to gain votes in some marginal Brisbane elections, the Prime Minister announced a $1.15 billion grant to fund the long-waited for Redcliffe railway line. So how did the local Courier Mail greet this piece of electoral largesse? With this headline above a churlish story saying that now the state government was going to be slugged $300 million for its share of the project plus, for some reason that is not altogether clear to a casual reader such as me, $8.2 billion for the Cross River rail project.
28-07-2010 couriermail
Just a bit down south the Gold Coast Bulletin was in no mood to give Labor any merit marks. It lamented all over page one the fact that Labor was ignoring the need for the Coolangatta railway extension!
28-07-2010 goldcoastbulletin
But the best “what about me?” for the day clearly went to theSydney Daily Telegraph with its front page blast.
28-07-2010 dailytelegraphdropdead

One big worry out of the way


At least one thing has gone right for Labor this week. The consumer price index figures released today by the Australian Bureau of Statistics should put an end to any thoughts the Reserve Bank board might have had about putting up interest rates. Inflation by all the measures is on the way down rather than up and safely inside the range the bank has as its policy goal.
28-07-2010 cpiallgroupsquarterlychange
The inflation measures the Reserve puts most emphasis on in its deliberations are shown in this chart from its website, which I have updated with today’s ABS numbers.
28-07-2010 underlyinginflation
All three measures are now inside the preferred two to three per cent range.

Who won the news cycle? Coalition the clear winner


It was a campaign day when nothing seemed to go right for Labor and the Coalition coasted by with barely a problem at all. Watching and listening to the television and radio news bulletins and current affairs shows was to witness a lead disappearing. The saboteurs within the Labor camp keep coming up with ammunition and Laurie Oakes is, sensibly, very happy to fire it. And when you avoid all serious content who can blame the rest of the media following along with enthusiasm.
By my count it was the easiest win any side has had in the campaign so far and takes the Coalition to the overall lead for the first time. A few more days like this one and we really will have a contest.
28-07-2010 dailywinner28july
Even the Crikey Election Indicator has stirred to narrow the gap slightly between the two sides.
28-07-2010 electionindicator28july

The election form guide


If you are really beastly careless about what happens on election night but still want to put some excitement into those hours in front of the tele at the Don’s Party equivalent you feel you have to attend then there are a couple of solutions.
The first and easiest one is to put an entry into the Crikey Election Tipping contest and watch with excitement as the results are declared in the 20 marginal seats where you have to pick the winners with $5000 going to whoever does best.
For all you wise subscribers to the Crikey Daily Mail this has the advantage of not costing you anything to be able to stand around at the end of the night saying “if only the Liberals had won …” and “why didn’t that stupid Labor mob spend more of their campaign in …”
That’s half the fun of election night.
The second approach is to treat election night as the equivalent of one big horse race meeting with lots of individual contests to have a bet on. Now I feel a little bit like a John Laws declaring an interest when I write this, but one of our Crikey sponsors, Sportingbet, is offering a multitude of ways to have a little election flutter on a whole range of outcomes. While I thank them very much for spending their advertising dollars so that one day I might get paid a living wage, in the meantime, as a desperate punter, I will be doing my best to win a dollar off them on my own account.
The starting point for my own punting deliberations is to try and work out  the probability of victory for each party in each of the 150 House of Representative seats. Now, as my years as a bookmaker myself proved to me, this in not an exact science but I’m still managing to have a glass of wine most nights after 50 plus years on the punt. So here goes and wish us luck as we try and increase Sportingbet’s price for advertising on Crikey!
The tables below give a probability for Labor, the Coalition and others (Greens, minor parties and independents) in every House of Representative seat. In the seat of Banks, the first on the list, 0.995 means that I think there is a 99.5% chance of Labor winning with the Coalition’s chances being 0.5%.  The figures are rounded to three decimal points so a figure of 0.000 does not actually mean zero but something less than  a 0.5% chance.
Where there is an asterix (*) next to a seat it indicates that the boundaries have changed since the last election so the current holder elected on the old boundaries might not actually be of the party indicated as holding it as this race begins.  We have, as it were, adjusted for handicaps imposed by the Electoral Commission.  The figures in red are the 20 seats in the Crikey Election Tipping contest.
27-07-2010 sets1
27-07-2010 sets2
27-07-2010 sets3
27-07-2010 sets4
27-07-2010 setsw5
Down at the bottom of the table you can see that I expect the ALP to win 83 seats (83.062 to be precise) to 63 (63.297) for the Liberals and 4 (3.641) for others - probably three Independent members as in the current Parliament plus one Green.
As a punter I will be searching for those seats in which the price being offered by those friendly Sportingbet fellows (see, I know how to give a plug to a sponsor just like Mr Laws used to do) is greater than what I think the odds should be. To convert the probability of victory in any seat into the equivalent of a bookmaker’s price, divide one by the probability as in Swan where 0.716 for the ALP becomes the equivalent of 1/0.716=$1.40. When I looked last night the Sportingbet price was $1.95 for Labor so for me that will be a bet.
Now if you are a really serious punter you will not need me to tell you that shopping around for the best price offered by the many online bookmakers is the best way to maximise your punting returns. But for those who don’t want to do the calculations for themselves, the following would be bets based on my probability assessment and Sportingbet’s prices at midnight:
Back Labor in these seats: Braddon, Brisbane, Lindsay, Dobell, Deakin, Forde, Bass, Corangamite, Hasluck, McEwen, Leichhardt, Swan, Dawson, La Trobe, Stirling and Sturt.
Back the Coalition in: Eden Monaro, Bennelong, Longman, Macarthur, Hughes, Macquarie, Dickson, Herbert, Bowman, Canning, Paterson, Wright and Wentworth.

Tuesday, 27 July 2010

The Daily Winner - Tony should thank Margie


There’s no more difficult role to play during an election campaign than that of the party leader’s spouse. You know you are just along side as a sideshow with no real role to play apart from appearing supportive. It is such an unnatural role that it’s easy to look embarrassed and awkward. So the opportunity for the Liberals to show that Tony Abbott really does have women in his life was well chosen yesterday.
His wife Margie Abbott is a director of a Sydney child care centre and she has, as she explained to the media, a passion for early learning which meant she was happy enough to be the “and friend” when the would-be Prime Minister launched his child care policy at Brisbane’s Kippa Ring centre.
She looked natural and relaxed in the environment as the television cameramen jostled for position while she listened to the children reading. And her spouse looked surprisingly at home playing king of the kids too. For the party apparatchiks it was as good a made for television appearance as they could have hoped for and enough to make it a winning campaign day for their side.
Not that Julia Gillard had a bad day. She was back on the hospital beat, albeit without a partner, playing to Labor’s strength and the nightly images reinforced the party’s promise to reform the public hospital system. The only weakness was that we have all seen such pictures so many times before in recent months but I suppose that’s what image reinforcement is all ab out.
27-07-2010 dailywinner27july
The Crikey election indicator remained unmoved by it all.

Changing opinions of a CIS guest

Niall Ferguson, MA, D.Phil., is the Laurence A. Tisch Professor of History at Harvard University and William Ziegler Professor at Harvard Business School. He is a resident faculty member of the Minda de Gunzburg Center for European Studies. He is also a Senior Research Fellow of Jesus College, Oxford University, and a Senior Fellow of the Hoover Institution, Stanford University. He writes a column for The Financial Times of London and made a television series for the BBC All-in-all a very important and, perhaps, influential fellow.

He is in Australia at the moment to give a lecture for the Centre of Independent Studies which probably allows us to put him in the non-Keynesian economists camp. But as people settle down to hear him deliver tonight's (Wednesday) John Bonython Memorial lecture in Sydney they might like to consider which particular Niall Ferguson they are listening to for he is clearly an economic historian capable of more than one viewpoint on the important matters of the day.

Because of his prominence as a pundit - what do we call the likes of him these days, public academics or something - the views of Professor Ferguson attract the attention of his peers and I have been following his contribution to the economic debate, along with the attacks on him, with considerable interest. With the exception perhaps of global warming, there is probably no more important political question at the moment than how the developed western economies of the United States, Japan and Europe should handle policies affecting growth and government debt.

Earlier this week I noted that J. Bradford DeLong of the Department of Economics, U.C. Berkeley wrote on his blog (one that I have on my daily must-read list) that “it would be a mitzvah” if someone took a piece Prof. Ferguson wrote for the New York Times on December 12, 2003 headlined “President Both: Bush Can Have Both Guns and Butter, At Least for Now” and compared it with his contribution to The Financial Times of London on July 19, 2010 called “Today’s Keynesians have learnt nothing.” According to DeLong, Prof Ferguson had made a “180 degree intellectual reversal” and someone with more time than he had should cut-and-paste them into “a Niall Ferguson vs Niall Ferguson debate."

Now, lo-and-behold, Matthew Yglesias and Ryan McNealy have answered the call at their Think Progress website. In this version of a debate, 2003 Ferguson is in boldface, 2010 Ferguson is in italics: 
Guns or butter: this is the choice historians conventionally say that governments face. The administration is currently engaged in an audacious — some would say reckless — experiment to disprove this theory. To judge by his actions, the President’s response to the question “Guns or butter?” is: “Thanks, I’ll take both.” This, in short, is the guns and butter presidency.
Are there precedents for such a combination? What’s to say this deficit-spending won’t work? Keynes would tell us that in the current environment we must boost aggregate demand.
Certainly. Long before Keynes was even born, weak governments in countries from Argentina to Venezuela used to experiment with large peace-time deficits to see if there were ways of avoiding hard choices. The experiments invariably ended in one of two ways. Either the foreign lenders got fleeced through default, or the domestic lenders got fleeced through inflation.
But the United States has broken the guns or butter rule before. Under President Ronald Reagan, substantial increases in military spending coincided with comparable increases, relative to gross domestic product, in personal consumption — that proportion of G.D.P. that the public, as opposed to the government, spends. The crucial point, of course, is that in the short term at least, fiscal policy is not a zero-sum game.
But this doesn’t respond to long run inflationary fears. When economies were growing sluggishly, that could be slow in coming. But there invariably came a point when money creation by the central bank triggered an upsurge in inflationary expectations.
But, as Keynes remarked, in the long run we are all dead! Aren’t these “inflationary expectations” priced into the markets?
New York Times columnist Paul Krugman, who likens confidence to an imaginary “fairy” have failed to learn from decades of economic research on expectations. All it takes is one piece of bad news – a credit rating downgrade, for example – to trigger a sell-off.
But this will not be the kind of inflation experienced in the 1970’s and 1980’s. So powerful are the deflationary forces today (notably in the second and third biggest economies, Japan and Germany) that Washington can splurge on its military and social services with only a modest impact on expectations of inflation.
But it is not just inflation that bond investors fear. Foreign holders of US debt – and they account for 47 per cent of the federal debt in public hands – worry about some kind of future default.
But the United States has a unique advantage over all other sovereign borrowers: central banks and other institutions around the world need to hold dollars as the currency most frequently used in international transactions. While this is true, America can count on selling large amounts of dollar assets, like 10-year Treasury bonds, to foreigners — very large amounts.
But for how long? The evidence is very clear from surveys on both sides of the Atlantic. People are nervous of world war-sized deficits when there isn’t a war to justify them. According to a recent poll published in the FT, 45 per cent of Americans “think it likely that their government will be unable to meet its financial commitments within 10 years”. Surveys of business and consumer confidence paint a similar picture of mounting anxiety.
The only imminent danger is that the dollar could slide sharply against Asian currencies, as it has against the euro. But the chief losers then would be the Asians. And those who panicked about the debt under President Reagan failed to see how manageable it was. It’s even more manageable today.
Hogwash. It was said of the Bourbons that they forgot nothing and learned nothing. The same could easily be said of some of today’s latter-day Keynesians!