President Obama calls opponents of Iran Deal as crazies. That is one variety. I am hoping that turmoil in financial markets will convince more of Democratic Congress members to back the Iran deal. Wavering Democratic members should be thinking - why bring 'war' when your hands are already full dealing with financial uncertainties? Apart from these Iran deal haters, I am talking about another variety of crazies in this post.
One of the leading GOP candidates, Scott Walker, wants President Obama to cancel state visit of Chinese boss Xi Jinping because washout in Chinese Market is causing Wall Street indices to go down. Meanwhile the leader of the pack of crazies - Donald Trump - is on 'I told you so trip' - Decouple from China! Plan more! What is Donald asking USA Government to do? Can he explain bit more coherently so as it becomes an actionable plan?
Na....that is the meaning of 'post-policy politics' practiced by today's Republican Candidates; all in the great tradition of Sen. John McCain who jumped the shark and suspended his campaign in 2008 in laughable manner.
If one keeps aside knee jerk politics, one can identify causes of continued global market chaos:
- China is having hard time 'soft landing her economy' from export driven high growth rate model to internal consumption oriented economy.
- Europe by large is still struggling economically.
- Resource dependent economies like Brazil, Russia, Venezuela, Australia, Canada, all are impacted by reduced Chinese demand and increasing Oil supply.
- Many countries are still fiscally mismanaged (again Venezuela, Brazil, China, India and most other third world countries).
- Finally, of course Janet Yellen's hand is likely to be hard pressed to increase Fed interest rate due to sustained strength in American employment.
All these things will for sure impact USA economy, but the impact can be manageable if politics is kept aside. But as expected, that might not happen and hence the global capital market drop is scary. For example, Fed is in bind as some experts are warning not to increase interest rates, while it is out of options (except QE4) to flood the market with cash. Fed has much less remedies to address the financial collapse now when the interest is already at zero than what remedies it had in 2008 when rates were high and QE was never used by then. But the politics will make it harder for Yellen to pursue a patient policy. Bernanke battled Paul Ryan's of the world successfully, it is not clear whether Yellen would withstand Trump and Fiorina's of today. This is because political Opposition tends to benefit politically in financial crisis by claiming 'change' without offering any coherent, practical, workable solution.
Another example of why one fears politicians more in such financial crisis is the conduct of Chinese leadership so far:
- Generally Chinese PM is responsible for managing economy with the purpose of shielding President from vagaries of financial markets. Xi wants to 'hog' all the credit and has made himself the poster boy of Chinese financial management. Anytime financial management fails, naturally the credibility of central leadership gets challenged.
- Xi made the blunder in exhorting Chinese people to buy stocks. He had a plan to exploit Capital Markets to beef up balance sheets of Chinese corporations - state and private alike. It went out of hand when Chinese Capital Markets ran ahead of Chinese Economic Growth rate. The shock to basic bargain - that Communist Party will take care of financial well being in lieu of compromised political rights - is big; coming at the cost of hundreds of billions (except that state pension funds will now enter stocks at bargain prices - some silver lining).
- Instead of following the promised reforms, Xi got caught up in the game of outwitting political opponents under the grab of catching corrupt folks. Cleaning corruption from Chinese system is essential. But longer term, sustainable solution for that is to develop independent judiciary system which will successfully take on law breakers in a reasonable time. Xi has no interest in developing such institutions in China. Result is low trust in reforms to remove corruption.
- Finally, while Chinese Leadership is busy managing Chinese Economy; there should not have been any distraction by undertaking jingoistic, nationalistic postures against neighbors in South Asian Sea. But Xi is engaged in building artificial islands when a measured and prudent course is needed to resolve difficulties via multi-lateral negotiations.
All these missteps by Xi - do they warrant President Obama not meet Chinese Leader? That is utter non-sense. Would that mean, when Shanghai Composite Index was flying high months on, President Obama should have given red carpet treatment to Xi Jinping every month? No wonder people doubt foreign policy chops of Scott Walker. But such non-sense and deliberate adoption of policies which will hurt common Americans is not restricted with Walker only. Across the board in Republican Party, any impeding financial crisis will be utilized to bring austerity, reduce badly needed public spending, to cut welfare spending and on top of it offer tax cuts to rich people in the name of more job creation. That is the true danger of Market collapse - Conservative politicians in countries like USA, Canada, UK, Australia (and Germany to an extent) would precisely adopt wrong policies. The danger in USA is real because as Economy and Capital Markets come under pressure, tendency of voters to adopt change or opposition party increases. Unlike 2008-10 there is no Democratic majority in any chambers of Congress to stop such destructive policies and there is no freshly minted President like Obama as in 2009 with competent economic advisers. Paul Krugman has already warned the impeding misuse of circumstances for ideological purposes by Conservatives. The job is cut out for progressives, leftist and democrats - to dispel this spell of 'misguided policies' by Conservatives in the name of addressing financial hardships.