The high level of anxiety among investors is
masked by the rise of equities. As political issues dominate many
discussions, the pessimism is palpable. It is fully understandable.
The economic crisis lingers for many.
Traditional
political elites appear to be at a loss. Many fear that the rise of populism and
nationalism is sweeping across the world. Democracy is under threat. In
recent years, many investors have become familiar with central bank stress
tests of financial institutions. Now it seems as if circumstances are
stress testing the world our parents and grandparents created after WWII.
The consensus
narrative stands on two legs. The first is that many have cried
wolf for several years, which not only make people less sensitive to more claims but leaves us emotionally and mentally
unprepared when the real wolf appears.
Consider that some have been claiming for many years that the world is experiencing a hegemonic stability crisis. The US is no longer stronger enough or no longer has the will to lead. Five years ago, we were told, there was a vacuum in international politics as countries pursued their own interests. If that were truly the case, then the revival of the 1920's America First, and the seemingly unilateral thrust of the new administration would not be as unsettling.
Consider that some have been claiming for many years that the world is experiencing a hegemonic stability crisis. The US is no longer stronger enough or no longer has the will to lead. Five years ago, we were told, there was a vacuum in international politics as countries pursued their own interests. If that were truly the case, then the revival of the 1920's America First, and the seemingly unilateral thrust of the new administration would not be as unsettling.
Many have been
predicting the demise of European integration for years. It has been derided
as a loose veneer for German hegemony. Within
two months of the slim majority of the UK voters rejecting continued EU
membership in what was offered as a non-binding referendum, Nobel-prize winning
economist Joseph Stiglitz joined the chorus of those predicting the demise of
the monetary union, which we are told is a threat to the EU (The Euro: How a Common
Currency Threatens the Future of Europe). Three years
earlier (2013), Jens Nordvig, a noted currency strategist, warned us of
the demise of the euro (The
Fall of the Euro: Reinventing the Eurozone and the Future of Global
Investing).
Similarly, many
analysts and journalists have been infatuated with the idea of currency wars
since 2010 when Brazil's Finance Minister Mantega accused the US over its
pursuit of unorthodox monetary policy. Yet,
the G7 and the G20 have denied it. Recall that during his campaign
in 2012, Japan's Abe and some of his advisers seemed too close to seeking a
competitive devaluation, and the G7 signed a new protocol reaffirming the
principle of letting the markets determine exchange values, except in
extraordinary circumstances. The comments and tweets by Trump could
represent a new assault on these principles, which we have compared to an arms
control agreement.
In addition to
crying wolf, the other leg on which the current consensus narrative stands is
the lack of faith in the representative institutions. Many armchair diplomats see Russian
President Putin and Chinese President Xi as the only strong leaders in the
world. Often in these accounts, there is an envy given the backdrop of
messy democratic politics. There is also a new genre of books that question
the merits of elections and representative government. Many of those who
are staunch believers of the representative government as a means and an end in
itself have little faith in the
durability of those institutions.
The resilience
of representative government and the checks and balances is what the consensus
narrative is missing. Globalization, the cross-border
movement of goods, services, and information has been evolving for decades.
Is it really ending?
Similarly, the constitutional order in the US is larger than any politician including the President of the
United States.
Too many
believe the narrative that holds populism is sweeping across the world. It is not. Instead, it appears
to be a function of the two-party system in the UK and US. The most
likely scenario is that the populist-nationalists are turned back in France and Germany. Next month's Dutch
election may be a different story, but even there, a plurality for Wilders' PVV
is not the same thing as securing a parliamentary majority or a referendum on
the EU or EMU (that would require a change in the Constitution).
The success of
Brexit in the UK and the populism in the US is not the result of parties
committed to it, like UKIP in the UK or an insurgent third party in the US. In both countries, the center-right party
appropriated the agenda of the populists. This
is not the case in the multi-party systems in continental Europe.
There the center-right parties like the Republicans in France and the
CDU/CSU in Germany want nothing to do with the populist-nationalists, like the
National Front and the AfD. Wilders also appears isolated in the
Netherlands.
Seventy-five
years ago this weekend, the populist US President Franklin Roosevelt signed an
executive order that led to the
internment of tens of thousands of American citizens of Japanese descent. The Supreme Court upheld the
actions, without ruling on the constitutionality of denying American citizens
due process. It was not until the late 1980s that reparations were made, an apology offered, and a mea culpa was declared.
US President Reagan, a former governor of California, where the bulk of
the Japanese-Americans had resided, signed the Civil Liberties Act in 1988. The US government apologized for the internment and
authorized the payment $20k (present value more than twice as much) to all camp survivors. The law acknowledged that the
US actions were based on
"race prejudice, war hysteria, and a failure of political
leadership."
Trump's executive order on immigration seems to many to be a not
very thinly veiled attempt to circumvent the prohibitions against religious
discrimination. It is being challenged in the judiciary system. The case may go to
the Supreme Court eventually (some suspect that the Administration does not
want to do this until its nominee is confirmed, though as we have repeatedly
seen, once a person dons the robes of a Supreme Court judge for life, the voting
pattern often surprises the President who made the appointment).
This is not a
breakdown of the system. This
is the checks and balances working. The 19th-century British historian Lord Acton claimed that "power
corrupts and absolute power corrupts absolutely." The answer is not
to eschew power but to divide it and check power with another
power. The different branches jealously protect their turf from encroachments
from other branches.
UK Prime
Minister May did not think that Parliament was required to trigger Article 50
that begins the formal process of amputating the UK from the EU. She reasoned that they approved the referendum and
that sufficed. The UK Supreme Court
did not agree. The system worked.
Many observers
thought the UK referendum was the first mover, and it would make it easier and
more desirable for other countries to leave the EU. It may be eventually proven right, but various polls
show support for the EU has risen in numerous members since the UK vote.
Similarly, Trump's use of the bully pulpit is not generating the kind of
results many had expected.
Since Trump was sworn in the currency that he seemed to beat up the most, the Mexican
peso, has been the strongest currency in the world. His tweets are not moving equities in the direction
one would expect. His criticism of traditional media, like the NY Times
and CNN has perversely seen support and viewership increase. Since Trump
and some advisers complained the dollar was too strong, it has generally appreciated. The system works.
Yes,
globalization and representative governments are being tested. The consensus narrative suggests
that it failed even before the test. And yet, a closer look at
developments warns that such a cynical assessment is more about fear than
reality. The resilience of globalization and representative governments
is under-appreciated. Neither globalization nor democracies are rolling over and playing dead. Just like the
columnist in the Financial Times who has been hypercritical of the EU and EMU
has changed his tune in the aftermath of Trump's attacks, so too some union
movements that were critical of free-trade are re-thinking.
The credibility
of the political and economic elites was
undermined by their inability to deliver the goods, a rising living
standard for a majority of people. The elites also failed to articulate
a compelling vision. Few officials in the UK stood up and offered a
positive argument of why the Tories led the UK into the EU (and the ERM).
Instead many of the Remain camp used negative scare tactics. The positive
case was left unspoken.
Stiglitz
defended economists by noting that the profession argued that as with any
policy, free trade would create winners
and loser. They had
anticipated that the winners would compensate the losers. In the US that
was missing and part of the political vacuum. The "American First"
thrust of the new administration is a wake-up call like none other.
The body
politic has been attacked, and the antibodies which were dormant (some confused it
with being dead) have begun mobilizing and resisting. The system works, and it is more resilient than many of its friends and
enemies suspect.
The Consensus Narrative does not Appreciate the Resilience of the System
Reviewed by Marc Chandler
on
February 16, 2017
Rating: