To hear “how very interesting” after a brief skip through the mathematics of the Electoral College still makes one’s heart skip a beat.
This year though, one has had few chances to experience that frisson of excitement as everyone seems to have decided the President has pretty much already won. As I write, he is quoted by spread bookmakers at the equivalent of 3:1 on to win, Governor Romney is 3:1 against.
History is against Obama
The first debate generated some renewed interest in the Romney campaign. Indeed, I think there are reasons to believe he has more of a chance in the election than the odds suggest.
The big issue will be the economy and here the surprise is the President is doing so well. The last President to be re-elected with the unemployment rate over 8% was Roosevelt. He managed it in 1936 and again in 1940. The last President to win re-election with consumer confidence at recent levels was Eisenhower in 1956.
Romney has had trouble giving a coherent message and has found it challenging to connect to mainstream voters.
Over a campaign that lasts well over a year no candidate is immune from occasional outbreaks of foot-in-mouth – and Romney has had his fair share. But he has not said anything so outrageous as to disqualify him.
His big problem has been an inability to connect the obvious gloom about the economic outlook to the President. All Presidents develop some form of Teflon coating just from the grandeur of the office. But Obama has been particularly skilful in seeming to have persuaded the consensus that he has done his best and it might have been even worse without him.
He often cites his intervention to support the auto industry, to indicate that unlike the previous administration he has helped more than just the financial industry.
For the past two years, Congress has also been a focal point of voter dissatisfaction. Several inglorious episodes have arisen from the division of the two houses, with the Democrats holding a majority in the Senate, the Republicans in the House of Representatives. The chaos around the last vote on raising the debt ceiling to allow the government to continue functioning coincided with a downgrade of the nation’s debt from triple-A. Congress took most of the blame for that in the popular consciousness.
View over a fiscal cliff
There has been concern that Congress will be similarly incompetent in dealing with the fiscal cliff of mandated tax increases and spending cuts that come into force at the end of the year unless action is taken to stop them. It seems increasingly likely that such action will be taken, so one expects this issue to become less important, and less of a hindrance to corporate confidence at least, in the weeks ahead.
But given that elections are no more than secondary indicators of consumer confidence, the helpful reduction in unemployment reported in early October has boosted Obama. Let’s see if the report in early November (just four days before the election) validates the improvement.
Of course the unemployment rate is the dominant influence now on US monetary policy. Indeed, the big-picture question is very straightforward. Will QE3, announced on 13 September, be more effective at promoting growth than prior extraordinary policy has been?
Of all the 269 stimulatory measures that have been announced by global policymakers in the past 13 months, QE3 is perhaps the most daring with its single-minded focus on reducing unemployment. Bernanke came into the Fed known as an inflation targeter. He will leave (on 31 January 2014) known as an unemployment targeter. That makes him a unique central banker.
He is conducting a grand experiment. He believes that GDP growth has been boosted 3% by the extraordinary policy actions taken so far, as he said at Jackson Hole in August.
Yet he also knows that the US economy has averaged growth of 2.2% since it came out of recession in Q3 2009. His own forecast suggests trend growth is 2.5%. So in the part of the economic cycle when growth should be strongest – the beginning of a recovery – growth has actually been below trend. That is an indication of the difficult times we live in.
Bottom line is growth through QE
The unemployment rate would be even higher were it not for the shrinking potential workforce, as people give up looking for a job. Therefore, Bernanke has decided that the answer is more QE now. Not after the election, but now.
This is a highly significant change in policy focus. The Fed’s reaction function has tilted away from its inflation-fighting objective.
One effect is that expectations for future inflation have jumped. So the five-year/five-year forward inflation breakeven rate (measuring the expected inflation rate in five years for the ensuing five years) rose to 3.03% from 2.86% the day QE3 was announced and has stayed at an elevated level.
The Fed is betting that indicators of growth accelerate more rapidly than indicators of inflation. Although one suspects that the Fed would be happy for both to be elevated as together they constitute nominal GDP. Company profits, and government tax receipts, are nominal data points so both will rise more if nominal GDP is rising more rapidly.
The bottom line is that Bernanke believes he is boosting growth through more QE. Obama will be hoping he is proved correct sooner rather than later.
Anyway, the fragility of the US economy suggests to this particular old politics student that he may well be in increasing demand to wax lyrical on his old specialist subject in the next month.
After all, one can triple one’s money between now and 6 November if Governor Romney wins. Anyone got a better trade idea than that?
