KICKING THE CAN DOWN THE ROAD

By Mohamed A. El-Erian


The good news -- and it is very good news -- is that Congress seems to have finally struck a deal that would reopen the government and dodge a debt default. In doing so, lawmakers have avoided (at least for now) a crisis of their own creation that would have tipped the country into recession, caused substantial job losses, and further eroded America's global standing -- all of which would have also undermined national security.

Yet the good news is not the result of a visionary solution that reconciles, even in a limited fashion, material differences of views on the size and scope of government; nor does it fundamentally realign political incentives in a constructive manner.

What emerged from Congress on Wednesday speaks to stop-gap measures born of exhaustion and political miscalculations, and prompted by national (and global) outrage.

By kicking the can down the road, our bickering Congress has created a temporary window for -- at least in theory -- more rational debate and decision-making. According to available information, the government would now be funded until January 15th and the debt ceiling would be pushed back to February 7th (with the ability to use extraordinary measures pushing that deadline to the spring).

Global markets are right to celebrate the removal of a potential economic catastrophe. Soon they will look beyond the clipping of this horrid "left tail," hoping that lawmakers:

1 ) Will not squander the opportunity presented by the December budget conference committee to agree on measures that enhance short-term growth prospects and longer-term fiscal reforms, while simultaneously removing a recurrent threat of government shutdown and default;

2) Will re-invigorate other important (and, critically, pro-growth) legislative initiatives, starting with bi-partisan immigration reform; and

3) Approve important nominations, including Janet Yellen as chair of the Federal Reserve.
Meanwhile, and notwithstanding the earlier taper talk, the Fed may now have no choice but to stay longer in its intense policy experimental mode - due both to the likelihood of weaker data and to a perceived need to take out insurance for the economy against future political dysfunction.

Markets will soon join the central bank in assessing the extent of lasting damage to the U.S. economy. Their initial hope was that the disruptions to demand from the government shutdown would prove both temporary and fully reversible. This is now tempered by the fact that lawmakers have postponed rather than resolved their differences.

Past experiences suggest that the next round of negotiations will not be easy. Moreover, in a few months, Congress will be that much closer to the November 2014 elections and, perhaps more importantly, the local primaries.

We should not be surprised if both companies and individuals were to consider postponing some important decisions, with a few even opting for greater "self-insurance." This speaks to the risks of lower consumption, less buoyant hiring and fewer investments in new plant and equipment - all ahead of the important holiday purchase season.

Then there is the international angle.

Unfortunately, it is not an exaggeration to say that many foreigners -- and particularly governments and central banks who use Treasuries in size to anchor their precautionary savings -- were taken aback by what they regard as Congressional irresponsibility (if not recklessness). Moreover, as China illustrates - where some have recently called for a "de-Americanized world" -- there are also domestic constituents there that are eager to look for better ways to safeguard their countries' financial reserves and wealth.

The more the world looks to dis-engage from the dollar-centric construct, the greater threat to America's economic power and influence. And while this is not something that happens quickly, the risk of cumulative erosion should not be lightly discarded.

The message from the American private sector (and international community) to Congress may best be thought of as a simple and urgent plea: Please put decisively behind you the shenanigans of the last few weeks and embark on constructive economic and financial governance - for neither our economy nor the plumbing of the global financial system would easily handle yet another set of self-inflicted crises in the next few months.

Bill Clinton used to refer to Obama as a Chicago thug, and compared voting for Obama to a roll of dice.  It turned out the Chicago thug is a bad roll of dice!  Basil Venitis, venitis@gmail.com, http://themostsearched.blogspot.com