The current Congress has not been winning many awards as the best and brightest. In fact, it’s been singled out for comical examples of ineptness, an ability to pass unimportant bills laden with pork, and gridlock stupidity on important issues that have repeatedly held markets and the economy hostage.
This year, unable to cobble together any kind of carefully planned strategy on fiscal policies, it simply allowed the automatic government spending cuts known as ‘sequestration’ to begin.
What is sequestration? Back in 2011, unable to agree on how long to continue the tax cuts and increased government spending that had helped rescue the economy from the financial meltdown of 2008, Congress passed a law saying that if an agreement was not reached by the end of 2012 the Bush era tax cuts would be allowed to expire, and sizable budget cuts would automatically begin in January, 2013.
The thought had supposedly been that the specter of automatic tax increases and across the board budget cuts, regardless of the condition of the economy by the end of 2012, would be so illogical that a sound plan would be worked out in the interim.
But, as we know, that did not happen, and sequestration kicked in January 1.
Meanwhile, the International Monetary Fund (IMF) admitted this year that it made a serious mistake in pushing European countries to dial back on their fiscal stimulus efforts (to tackle government budget deficits) way too early. The result was a blow to economies that has the 17-nation eurozone in another recession.
In April, the IMF warned that the “overly strong” spending cuts in the U.S. mandated by the sequester would slow the U.S. economy too much. It urged Washington to slow the measures and wait until the economy gains more strength.
And in his testimony before Congress in May, Fed Chairman Bernanke warned that the now “significantly more restrictive fiscal policy at the federal level… in particular the expiration of payroll tax cuts, the onset of sequestration, and declines in defense spending are expected to exert a substantial drag on the economy this year”. And that even the Fed’s unusual degree of QE monetary stimulus “does not have the capacity to fully offset an economic headwind of this magnitude.”
But Washington has paid no attention to the warnings.
Meanwhile, this week’s surprise downward revision of first-quarter GDP growth to just 1.8%, from the previous report of an already dismal 2.4%, indicated the automatic fiscal sequestration already had a significant effect on the economy in just its first three months of implementation.
Yet there’s something odd going on in the political arena.
Republicans are hanging tough on the new austerity measures and would even like to increase them, while the Obama administration is fighting back at them and trying to find ways to soften their effect on the economy.
Assuming that the main interest of politicians is a self-serving focus on the next election, both parties need to look at the Four-Year Presidential Cycle, and particularly how those who came before them handled the cycle (in fact may have sometimes manipulated its formation if it wasn’t happening on its own).
First, there is a very long history of the economy and stock market running into problems of some degree during each Administration’s four-year term. Often the problems can be serious, since over the last 110 years there have been 25 bear markets, or one on average of every 4.4 years, with average declines of 36.5%.
There is also a very consistent historical pattern, the Four-Year Presidential Cycle, in which if there is an economic or market problem during a presidential term, it almost always takes place in the first or second year (or both) of the term. Fortuitously, that leaves plenty of time for the administration to pull out all the stops in the third and fourth year to make sure both are recovered and booming again when the next election rolls around.
In the past it often seemed that if Administrations did not actually welcome problems in the first year or two of their term, they at least did next to nothing to prevent them, rather than take a chance they would be delayed into the third or fourth year, which might leave insufficient time to have them recovered by re-election time.
However, in this cycle, we have President Obama fighting back at the sequester plan, trying to find ways to soften its effects on the economy, trying to keep the economic and market problems at bay, raising the odds of only postponing the problems into the third or fourth year of his administration, leaving little time to orchestrate a recovery. That is exactly what happened when Presidents Reagan and Clinton in their second terms managed to keep the economy and markets strong through the first and second years. The 1987 crash then took place in the 3rd year of Reagan’s second term, while the severe 2000-2002 bear market began in the 4th year of Clinton’s 2nd term.
And we have Republicans refusing to pull back on the automatic budget cuts imposed by sequestration, making problems for the economy and markets more likely in the first two years of the Four-Year Presidential Cycle, which would leave plenty of time for the Obama administration to orchestrate a recovery and a Democratic victory in 2016.
If it’s all about elections, it does seem odd.
But maybe today’s politicians, like today’s investors, are not as aware of economic and market history, and how consistently it repeats to affect their prospects a year or two out, concerned only with today’s headlines, and what might happen tomorrow or next week.
Sy is president of StreetSmartReport.com and editor of the free market blog Street Smart Post. Follow him on twitter @streetsmartpost. He was the Timer Digest #1 Gold Timer for 2012 (Gold Timer of the Year), as well as the #2 Long-Term Stock Market Timer.
