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US emerging-market moment is over
By David Gordon and Sean West |
July 26, 2012, Thursday
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ONE of the biggest shocks of the financial crisis was that stable wealthy countries could come to resemble unstable emerging markets in both behavior and market perception.
When the US asserted control over its financial and auto companies, the very distinction between developed and emerging nations disappeared.
Europe continues to be a source of sovereign risk comparable to less-developed countries. The same couldn't be said, however, about the US: Its emerging-market moment is over. Yet, this reality seems lost on the commentariat, many of whom fixate on every potential risk around every possible corner.
The emerging-market moment in the US was real. A newly elected President Barack Obama vowed to block bonuses at American International Group Inc; US Congress overhauled major pillars of the economy in swift succession in 2009 and 2010; and then legislators danced close to default on US debt in 2011.
Nothing says emerging market like breaking contracts, reshaping multiple sectors at once and threatening to stiff lenders.
Exceptional again
By mid-summer 2011, bond investors reminded everyone that the US is again exceptional. Despite the games the US played with its debt limit, its failure to do anything serious on deficit reduction and the subsequent downgrading of its credit rating, investors spooked by greater risks in Europe and elsewhere fled to US Treasuries and the dollar.
As a result, US borrowing costs remain near historic lows. Nothing says haven status like a legislature barely agreeing to pay its debts and being rewarded with lower borrowing costs.
So why do pundits and politicians continue to act as if the US is a risky sovereign like Greece, in desperate need of a fiscal plan and in constant search of pliant lenders lest it face a crisis?
Such dire prognostications are way off base - and the so-called fiscal cliff is perhaps the biggest red herring.
Right after the election, in an atmosphere of high distrust, officials in Washington must resolve a fiscal drag equal to 5 percent of gross domestic product. In an emerging market - or Europe, for that matter - this would be a recipe for disaster: a sharply divided legislature would need to choose between reneging on fiscal promises designed to placate lenders or brokering a politically treacherous substitute deal in a condensed time frame. But policy makers have an easy way out because the US will not be subject to such financial pressures.
US haven status all but guarantees that the lame-duck Congress and Obama will agree to forgo the austerity that makes up the fiscal cliff, and they won't suffer for doing so. By contrast, failure to agree on that course would trigger huge economic carnage that citizens would blame on the political class. Thus, the fiscal cliff comes down to a choice between kicking the can into 2013 at no political cost or not doing so at high cost. Don't be surprised when the president and Congress choose the former.
Failing to recognize that the US has this luxury and will use it leads to faulty forecasts about the future. No crisis looms. And no deficit-reduction grand bargain is in the making because the US no longer needs one to forestall crisis.
Haven curse
Just because the US is no longer acting like an emerging market doesn't mean it faces no risks. Because Congress has no need to act, it won't - and the costs of acting later will be more expensive. This is the essence of the haven curse that the US suffers.
Moreover, congressional gridlock amid economic weakness can force the Federal Reserve to respond, and the executive branch to exercise its prerogatives - and both of those actions are less transparent than the traditional political process. But none of this approaches the level of risk and instability that characterizes Europe or more politically risky developing countries.
Congress and the president will make a deficit deal on a scale and in a time that are politically viable. They won't force the US into a huge economic contraction just to prove a point.
David Gordon is head of research at political-risk consulting firm Eurasia Group and is a former director of policy planning at the US Department of State. Sean West is head of Eurasia Group's US practice. The opinions expressed here are their own.
When the US asserted control over its financial and auto companies, the very distinction between developed and emerging nations disappeared.
Europe continues to be a source of sovereign risk comparable to less-developed countries. The same couldn't be said, however, about the US: Its emerging-market moment is over. Yet, this reality seems lost on the commentariat, many of whom fixate on every potential risk around every possible corner.
The emerging-market moment in the US was real. A newly elected President Barack Obama vowed to block bonuses at American International Group Inc; US Congress overhauled major pillars of the economy in swift succession in 2009 and 2010; and then legislators danced close to default on US debt in 2011.
Nothing says emerging market like breaking contracts, reshaping multiple sectors at once and threatening to stiff lenders.
Exceptional again
By mid-summer 2011, bond investors reminded everyone that the US is again exceptional. Despite the games the US played with its debt limit, its failure to do anything serious on deficit reduction and the subsequent downgrading of its credit rating, investors spooked by greater risks in Europe and elsewhere fled to US Treasuries and the dollar.
As a result, US borrowing costs remain near historic lows. Nothing says haven status like a legislature barely agreeing to pay its debts and being rewarded with lower borrowing costs.
So why do pundits and politicians continue to act as if the US is a risky sovereign like Greece, in desperate need of a fiscal plan and in constant search of pliant lenders lest it face a crisis?
Such dire prognostications are way off base - and the so-called fiscal cliff is perhaps the biggest red herring.
Right after the election, in an atmosphere of high distrust, officials in Washington must resolve a fiscal drag equal to 5 percent of gross domestic product. In an emerging market - or Europe, for that matter - this would be a recipe for disaster: a sharply divided legislature would need to choose between reneging on fiscal promises designed to placate lenders or brokering a politically treacherous substitute deal in a condensed time frame. But policy makers have an easy way out because the US will not be subject to such financial pressures.
US haven status all but guarantees that the lame-duck Congress and Obama will agree to forgo the austerity that makes up the fiscal cliff, and they won't suffer for doing so. By contrast, failure to agree on that course would trigger huge economic carnage that citizens would blame on the political class. Thus, the fiscal cliff comes down to a choice between kicking the can into 2013 at no political cost or not doing so at high cost. Don't be surprised when the president and Congress choose the former.
Failing to recognize that the US has this luxury and will use it leads to faulty forecasts about the future. No crisis looms. And no deficit-reduction grand bargain is in the making because the US no longer needs one to forestall crisis.
Haven curse
Just because the US is no longer acting like an emerging market doesn't mean it faces no risks. Because Congress has no need to act, it won't - and the costs of acting later will be more expensive. This is the essence of the haven curse that the US suffers.
Moreover, congressional gridlock amid economic weakness can force the Federal Reserve to respond, and the executive branch to exercise its prerogatives - and both of those actions are less transparent than the traditional political process. But none of this approaches the level of risk and instability that characterizes Europe or more politically risky developing countries.
Congress and the president will make a deficit deal on a scale and in a time that are politically viable. They won't force the US into a huge economic contraction just to prove a point.
David Gordon is head of research at political-risk consulting firm Eurasia Group and is a former director of policy planning at the US Department of State. Sean West is head of Eurasia Group's US practice. The opinions expressed here are their own.
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