x Abu Dhabi, UAESaturday 22 July 2017

Obama's words lack the needed reassurance

Barack Obama's televised comments about US debt and the markets didn't deliver what investors needed to hear.

We've no idea what Barack Obama said after facing the cameras on Monday, but maybe it was: "Oops, did I do that?"

As he addressed the American nation, Wall Street marked his every word by ever steepening plunges in major indexes. Wittgenstein once wrote that "whereof one cannot speak, thereof one must be silent", on the relationship between language and reality. Pity that the otherwise clever Mr Obama didn't have that in mind when he chose to go on TV during the middle of a trading day when investors were hoping for some - any - indication that he and his bright boys and girls in the White House would offer ideas to at least soften the arc of the Dow's dive. Instead, his language proved surreal in the circumstance, focused as it was on blaming politics for America's ills.

These are perilous times. Were it only a matter of stock investors in the US, that is at least only a small part of the world. But markets around the globe are looking for leads from Wall Street to arrest their fall. More distressingly, world equity, oil and other commodity markets in sharp decline threaten the ability of the real economy to keep producing, putting incomes and jobs at risk. Although talk the past two years of a double-dip recession was misguided, the danger of such an outcome is more plausible today as a series of market, economic and fiscal crises converge. New issues of US debt will be priced higher after the ratings downgrade, holding American mortgage borrowers hostage. A further entrenchment of the dollar's weakness re-prices down the value of global assets. Countries with currencies pegged to the dollar can expect an acceleration of imported inflation. And in a trice, trillions of dollars of wealth disappeared on Monday, prompting consumers to think again on spending plans.

To be sure, it's unfair that the fortunes of the world should be on America's shoulders. But as the world's largest economy - and therefore wealth producer - and custodian of the world's biggest financial markets - and therefore wealth enabler - America leads whether it wants to or not. The world will look to Washington for cues on stabilising markets beyond short-term rallies. Europe needs to do its part, too. Before Standard & Poor's dropped its bombshell, US markets were fretting about the expanding European debt crisis: US firms sell a quarter of their exports to Europe and derive a significant portion of profits from the continent.

The European Central Bank will need to be more convincing in its bond-buying programme. For stabilising Europe will stabilise prospects of American corporations' cash flow. And this will calm the roiling waters of the equity markets. All this might seem unfairly focused on America, but in finance the world's fate hangs on the outlook for the planet's biggest consuming and producing market.

In the grip of a panic, markets need reassurance. In this case, revelations of cooperation across jurisdictions, as well as market-focused responses to threats to bond prices for starters. Just don't, as Mr Obama did, say you'll have proposals to fix the fiscal deficit, but "in the coming weeks". That's saying nothing.