Obama vs. Congress: the re-election campaign begins

With his speech on the jobs bill, Obama has set himself up against the "do-nothing" Congress.

It looks like Barack Obama has launched his re-election campaign. In a speech to Congress, he unveiled the American Jobs Act, and in effect dared Republicans not to pass it.

The bill reaches out to Republicans on many points. Much of it consists of tax cuts, with a $240bn expansion of the cut in payroll taxes promised, as well as a tax holiday for smaller businesses hiring new employees. He also said that Medicare spending needed to be cut. The bill also retains some spending commitments, such as $140bn for modernising schools and repairing roads and bridges.

In his speech, Obama eschewed the soaring rhetoric for which he is famed, instead urging Congress to "pass this jobs plan right away". Initial responses from Republican leaders imply that they are receptive, although it is unlikely they will pass it in its entirety.

With the lowest approval ratings of his presidency, currently floundering in the 40s, Obama faces the dual challenge of shaking off the public perception that he has failed to deliver on the economy, and the intransigence of the Republican-controlled House.

Tactically, this speech adopted a clever position. Obama's own approval ratings may be dipping, but an incredible 82 per cent of the US public think that Congress is doing a bad job. This suggests that the cynical politicking seen during the debt ceiling crisis did not go unnoticed.

Over at the Huffington Post, Howard Fineman suggests that the speech will set the tone for Obama's re-election campaign:

By putting forward a simply-named, to-the-point bill -- the American Jobs Act -- and by challenging Congress to pass it and pass it now, Obama hopes to create a win-win: either the Congress accedes or, as President Truman did in 1948, he can run against the "do nothing" Congress.

This strategy has the potential to be effective, given public frustration with politics in general. With some comments bordering on sarcasm, he presented the debate as a conflict between the majority of voters, and those who believe that "the only thing we can do restore prosperity is just dismantle government, refund everyone's money, let everyone write their own rules, and tell everyone they're on their own."

But the relentlessly confrontational stance that Republicans have so far adopted is not Obama's only problem: there is also the jobs question itself. Analysts predict that the plan, if passed, will encourage growth, but unemployment remains stuck at 9.1 per cent and it is unlikely that this bill -- however well-intentioned -- will substantially change that. However, after weeks of what many viewed as a frustrating lack of action, it is good to see Obama get off the back foot and go in fighting.

 

Samira Shackle is a freelance journalist, who tweets @samirashackle. She was formerly a staff writer for the New Statesman.

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The Asian Financial Crisis 20 years on

In the four years between 1993 and 1996 the tiger economies of Asia led the world in terms of gross domestic product (GDP) growth and stock market returns as foreign and local investors piled in and embraced the opportunity.

In the four years between 1993 and 1996 the tiger economies of Asia led the world in terms of gross domestic product (GDP) growth and stock market returns as foreign and local investors piled in and embraced the opportunity. But trouble was brewing and Thailand was the canary in the coal mine. Strong growth was being funded by ever increasing levels of debt and with offshore interest rates far more attractive than those available at home, US dollars became the funding currency of choice.

While currencies remained pegged to the US dollar risks were minimal but as a growing trade and current account deficit and rising inflation led to increasing overvaluation of the Thai Baht, speculation grew and short-term money started to move out of the Thai currency.

In July 1997, after a futile attempt to stem the outflow, the Thai central bank removed the peg triggering an immediate 25% fall in the currency - by the end of the year it had lost half of its value. The impact on the economy was devastating. Interest rates initially spiked making dollar debt significantly more expensive. Loans started defaulting, peaking at almost 50% of total loans in 1999. The figures reflect the severity of the downturn: GDP took five years to return to pre-crisis levels, consumption – the use of good and services by households - was four years, and private sector loan growth only returned to positive territory in 2002.

Although Thailand was the trigger, the ticking time bomb of unhedged foreign currency debt and a  prolonged period of over-exuberance prevailed across all of South East Asia.  The Philippines and Malaysia were also significantly impacted but the most significant downturn occurred in Indonesia, which, although running a current account deficit only half the size of Thailand, saw its currency go from 2000 rupiah to the US dollar to 16000, and bank loan books fill up with defaulting loans.

Contagion and a severe lack of confidence dented the whole region and although Hong Kong managed to hold on to its peg to the US dollar, a prolonged period of high interest rates and slower growth resulted in a 40% fall in residential property prices and a deflationary period that took many years to recover from. Even South Korea, which was the 11th largest global economy at the time, had to call in the International Monetary Fund (IMF) as interest rates ballooned and the currency weakened.

The recovery, which on average took more than 5 years, was supervised by stringent IMF requirements and has put Asian economies on a much firmer footing. With a few exceptions Asian currencies are free floating, meaning their value is determined by the foreign exchange (forex) markets through supply and demand, and as a result they have much more flexibility to reflect domestic economic cycles ensuring that pressures don’t build. Current and trade accounts, with the exception of India and Indonesia, are now in surplus, with the practice of unhedged foreign borrowing all but ended. Short term foreign debt in ASEAN (the Association of South East Asian Nations) nations has dramatically dropped from 160% to now less than 30%.

The Global Financial Crisis (GFC) in 2008 was borne out of exuberance in the West but not in the East and although Asian economies were impacted by the slowdown in global growth, Asian economic credibility was never called into question.

The only economy that is showing a worrying trend is China. A credit boom following the GFC has seen debt-to-GDP balloon from 160% in 2008 to 260% in 2017. The nature of this debt however is different from that accrued by South East Asian Countries in the late 1990’s. Firstly, most of the debt lies with state owned enterprises (SOEs) and is hence backed by the >$3tn worth of foreign exchange reserves, and most of it is denominated in renminbi. Secondly, although China operates a managed exchange rate regime against a basket of trading currencies, the capital account is closed which restricts the amount of speculative flows. Finally, a lot of the debt is owned by domestic institutions and is long term in nature which reduces the likelihood of enforced withdrawal leading to a liquidity crisis.

The impact of the Asian crisis lives long in the memory of Asian corporates. The days of rapid expansion and growth for the sake of growth have gone and been replaced by conservatism and a focus on cash flow and profitability. Corporate debt levels are at all-time lows while cashflow compares favourably to any other region of the world. Interestingly it is developed economies that are now showing the stresses Asia encountered and recovered from 20 years ago; Asia in comparison looks favourable.

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