Monday, October 14, 2013

The contrasting fortunes of Clinton and Obama

The current US government shutdown is only a minor sideshow in the relentless march towards economic depression. The standoff between the two parties seems idiotic to bear watching as both are clueless as to the unfolding economic scenario. Actually, no one has a choice as, deficit reduction or not, the debt will dwindle by itself. It's this dwindling that will see to the global economic depression which will leave more and more countries fractured and in ruins.

During the ending phase of a Kondratieff Wave, the economy can only be sustained by increasing credit as growth is no more to be found. But credit growth will eventually hit the wall as everybody wants to save leaving only the government to borrow. Technically, there's no limit to how much the US government can borrow since it prints its own money. However politically, the end of the Wave will also give rise to a weak government with curtailed powers of spending and legislation.

It's the fate of a superpower that it collapses by implosion. The British Empire saw most of its colonies breaking away within 20 years after WW2. It took the 1956 Suez fiasco to make Britain realise that it no longer ranked as a superpower. Britain's retreat actually began the moment it lost the lead of the second Kondratieff Wave in the mid 19th century. The USSR lost its domination of Eastern Europe in 1989 and within two years, it itself splintered into 15 independent nations. The Soviet's rise and fall was short and swift, all within a span of 50 years.

All these can be accounted for by the Kondratieff Wave. Britain lasted only up to the end of the 3rd Kondratieff Wave because by then, other countries could match, if not overtake, it in industrial production. In the 4th Wave, Britain sought shelter in financial services. The USSR couldn't even last one Kondratieff Wave, relying initially on 3rd Kondratieff Wave technology but towards the end of its superpower reign on commodities after it had been bested by its capitalist rivals in technology. The recent resurgence of Russia would be a short one, again assisted by oil prices.

A superpower doesn't diminish because of war; in fact, it thrives on war. An external conflict pulls the country together while an internal one pulls it apart. The cause is always economic. As money self-destructs, the internal conflict gets more intense, fracturing government and society as evidenced by the greater polarisation of beliefs and views. The events that are unfolding in the US characterise the incipient stage of a superpower breakup. As it is, the US has begun pulling back from the world stage, signalling that from now on, every country has to face up to a new geopolitical reality, not of war between states but of intra-state break-up as the US current account deficits that have been financing many states get smaller and smaller. Of course, there's one more Kondratieff Wave but the beneficiaries of that Wave look likely to be small groups or even individuals rather than nation-states.

Although the primary cause of nation-state breakups is economic, it's shrouded by other easily drawn reasons, the most obvious being ethnicity and religion, especially where there exists a sizeable ethnic or religious minority. This minority can either be economically or politically underprivileged and harbour feeling of resentment or they can be privileged in which case the hurt is felt by the majority. It's the reality of a market economy that wealth accumulation will become lopsided and this imbalance gets more extreme at the end of a Kondratieff Wave. Even when the society is homogeneous, tensions can arise as a result of differing economic status, values and beliefs, such as liberals versus conservatives, the haves versus the have-nots, and seculars versus religious. It's also the reality that birds of the same feather flock together. Members of each group will seek each other out, moving into the same neighbourhood, further accentuating their skewed view of the world.

Most countries will not be immune from this increasing polarisation of wealth and views. At this stage of the Kondratieff Wave, any dispute if not quickly resolved can easily snowball. So it is with the US government shutdown. Bill Clinton has advised President Obama to call the Republicans' bluff by refusing to negotiate. It worked under his watch with the GOP bearing the wrath of the public. Even now, the Republicans are suffering more than the Democrats in the polls. But how things will turn out in the next few more months cannot be easily predicted because the money supply is going to worsen under Obama whereas under Clinton, it was building up (see chart above).

Obama is not to be blamed for this mess and neither should Clinton get credit for the debt growth under his watch. Obama has been handed a weak hand to begin with. Clinton got a better hand but in his first two years the debt growth was non-existent. So in the first mid-term elections of both administrations, they lost control of the House though Obama managed to retain the Senate though with reduced majority while Clinton never recovered control of both houses in the remaining years of his administration. But Clinton could do without Democratic control of both houses because he was gaining strength from the money supply growth which actually accelerated in his second term.

In the 3rd year of their administrations, Clinton had a debt ceiling shutdown while Obama almost had one though he managed to avoid it with enough concessions to tide over the 2012 presidential election. In Clinton's case, the Republicans reached an agreement with the President for a balanced budget by 2002 but Clinton managed to deliver a balanced budget in 1999, 3 years ahead of time. Could the Obama shutdown do the same? To find out, let's parse the debt growth under both administrations as shown in the following charts (Clinton's on the left).

It's evident that it was Clinton's good fortune that the other sectors of the economy were all driving up debt growth as a result of the dotcom boom thus enabling Clinton to secure his balanced budget. Obama on the other hand has the bad fortune of seeing all these 3 sectors suffering from debt constriction leaving him no choice but to keep ramping up government debt.

During their reelection years, we can see that Obama benefited from an uptick in the total credit but for Clinton the total credit was flat. That explains the low turnout of 49% in 1996. Clinton also secured his second term despite getting less than 50% of the votes, thanks to the spoiler effect of Ross Perot. Obama on the other hand can thank not the voters but the business community which increased their debt growth in the same quarter as the presidential election. But for the future, Obama's Faustian pact will come back to haunt him. The government debt growth has plateaued and so will the business debt growth. As for the financials and households, they will continue to shrink.

Will Obama share the same fate as Clinton? When Clinton was impeached in 1998 by the House for perjury and obstruction of justice, the debt growth by then was on a roll. The Senate unsurprisingly acquitted him. Instead, Newt Gingrich, the House speaker who had led the charge for Clinton's impeachment was the one who had to step down when the Republicans themselves threatened to rebel against him after realising that he was a liability to his own party.

Had the Republicans approved the current budget and allowed the debt ceiling to increase, they wouldn't have been faulted for the coming economic depression. Instead Obama's credibility would have been destroyed as in the past few months he has been touting economic recovery unaware that it will soon reverse course with the debt decline. The Republicans just need to wait for next year's mid-term election to gain control of the Senate and impeach Obama for his poor management of the economy and weak leadership of a superpower nation.

With the present crisis, Obama can now turn the tables and put the blame solely on the Republicans. But as Harold Wilson, the former British PM once said, "a week is a long time in politics", now shortened to one hour by Gordon Brown, anything can happen between now and November 2014. The Republicans can salvage their battered reputation by not doing anything silly. Just watch Obama lurch from crisis to crisis. Probably the Democrats themselves will impeach their own President.

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