By: Andrea Cohen
This week’s column is of a different nature. I would like to discuss the upcoming elections in the US in November; what the different outcomes will mean for the local and global economy; and what I think is going to happen.
On November 6th, American voters will cast their ballots for (among others) the President of the United States. Democrat incumbent Barack Obama and Republican Mitt Romney are at a head-to-head race that has already seen a few interesting turning points.
Current polls generally predict a victory for President Obama, although after the first Presidential Debate (held in Denver on October 3rd), some polls actually predicted a victory for Romney. I will put predictions aside and try to concentrate on the outcome. However, it’s important to keep in mind that Americans will elect more than just a President in November. Together with the Presidential ballot, they will also vote for Congress (House of Representatives and the Senate).
Looking Forward, Looking Back
The likely outcome is a Democratic win in the Presidential elections and a Republican one in the elections for Congress. That is not new territory for Obama, but will certainly make his life harder.
A few weeks ago, the Federal Reserve announce the commencement of QE3 - Quantitative Easing which means injecting money into the economy by buying securities held by financial institutions. As the name implies, this is the third round of QE. Q1 started when President Bush was still in office, and continued once Obama was already elected to replace him. QE2 took place under the Obama administration, as well. This, some would say blunt intervention of government in the market is one example of the possible differences between Democratic and Republican presidents. In general, Republicans are the champions of free enterprise. They are in favor of free markets, little regulation, and minimal government intervention and reach. Democrats, on the other hand, see the government’s role in a more comprehensive manner. Of course, under either rule, capitalism will prevail in America, but as Democrats advocate “big government” their budget is appropriately larger than Republicans’, and higher government expenditure means that the government needs to either raise more money by issuing debt or by raising taxes.
If Obama is re-elected, the Fed will likely be allowed to continue with similar active interventions in the market (QE, “Operation Twist”, etc.) Having Mitt Romney in the Oval Office could mean that government will curb its expenditures, and in the process, the government’s role in the markets. The Fed has a dual mandate – price stability and maximum employment. Under the Republicans, the Fed is more likely to concentrate on the former rather than the latter.
What Else?
What about real expenditures? Well, data coming out of the US in the last few months is rather encouraging. Mainly, the labor market is improving consistently, with about 100,000 new jobs added each month (not including farm jobs). Industrial product numbers are also encouraging and show persistent (even if somewhat low) growth. These numbers must be taken in context. The world is in a recession. The worst part is that Europe is a time-bomb that can go off at any minute and throw the world into such economic turmoil that it will make the recent recession look like a walk in the park. This makes the American recovery impressive and as it is perceived as the safest among the largest economies at the moment, more inflows of foreign money can be expected.
Most important, though, is the “Fiscal Cliff”. The Fiscal Cliff is a term used to describe the sudden change in budgetary reality that may occur at the beginning of 2013. At that time, temporary measures are about to expire and leave the US government with more revenues and fewer expenditures. That’s right. I said, “More revenues and fewer expenditures”. What’s the problem, then?
Well, arguably, much of the impressive recovery just discussed can be attributed to these measures and overturning them may risk these accomplishments and send the US into a recession again. The decision about whether to extend the program (and thus artificially support growth at the cost of increasing deficit) or discontinue it (which means lower deficit, but a probable recession) depends on the identity of the next President.
Obama will likely extend the program, at least until things improve elsewhere in the world. Romney, on the other hand, the champion of free markets and small government, may discontinue these measures. The key word here is “may”, of course, as once in office, the last thing he would want to kick off his term, is a recession.
Affects of American Foreign Policy
Last thing I would like to discuss is foreign policy. American foreign policy is involved in pretty much every region of the world. The one issue that I think will get most of the attention (in the short-term, anyway) is Iran. With elections in Israel at the beginning of 2013, the probability of a strike against Iran’s nuclear facilities before that time is very low. After the elections is a different story. With Israeli PM Netanyahu the likely winner of the 2013 elections, the hawkish tone from Israel is likely to be maintained. We already know that President Obama is not in favor of a strike and prefers to take the diplomatic path. But Romney is a different case. A close personal friend of PM Netanyahu’s, Romney is more hawkish and deliberate in his statements regarding the prospects of a nuclear Iran. A Romney win in the election may mean that a military strike against Iran is on the table. Such a strike would send oil process up violently, with shockwaves in the form of inflation, worldwide.
Keep this in mind when you listen to the exit polls on November 6th and be prepared to trade on the results.