Al Ries is a marketing consultant who coined the term “positioning” and is the author of such marketing classics (with Jack Trout) as The 22 Immutable Laws of Marketing and Positioning: The Battle for Your Mind. He is also the co-founder and chairman of the Atlanta-based consulting firm Ries & Ries with his partner and daughter, Laura Ries. Along with Laura he has written bestsellers like War in the Boardroom and The Origin of Branding. In this interview he speaks to Vivek Kaul and analyses why brand Barack Obama emerged stronger than brand Mitt Romney.
How would you define the brand Barack Obama? What are the three characteristics that you would attribute to him?
Consistent. The three characteristics I would attribute to Barack Obama are (1) Consistency. (2) Consistency, and (3) Consistency. He took office promising “change.” And the major changes he promised include creating jobs, reforming the health-care system and reducing the deficits by increasing taxes on the wealthy. He has never wavered from these three basic principles.
Brand experts talk about a strong story accompanying a brand. What do you think is Obama’s story?
His story is his climb from poverty to a law degree from Harvard, our most-prestigious university. It includes his birth to a Kenyon father and an American mother, one black and one white. He is unique. Very few politicians have a story quite like Barack Obama. One exception is John McCain, who was defeated by Barack Obama in the 2008 Presidential elections. John McCain’s story is the five-and-a-half years he spent in Vietnam as a prisoner of war and the torture he endured. This created a tremendous amount of sympathy for him. But he lost the election because he was handicapped by the negative reaction to the eight years of the previous President, George W. Bush.
What are the right things that Obama did to build brand Obama in the run up to the elections?
His entire campaign was built around a single idea and he expressed it with a “two-sided slogan.” A two-sided slogan is like a two-sided knife. It cuts both ways. It says something positive about your brand and something negative about the competition.
Could elaborate on that?
Take “Believe in America,” Mitt Romney’s slogan. It’s a nice thought, but it’s a one-sided slogan. It says something positive about Mitt Romney, but what does it say about his opponent?
That Barack Obama doesn’t believe in America? A country that educated him at Harvard. A country that elected him to the Senate and the Presidency. A country that made him wealthy and world famous. Barack Obama doesn’t believe in America? Highly unlikely.
What does Obama believe in? The number one issue among voters is “jobs,” but he couldn’t claim much progress on this issue because of the economy. His best approach was to plead for more time to “finish the job.” So he used the slogan “Forward.”
And what did that imply?
His “Forward” slogan implied that Republicans want to go backwards to policies that failed in the past. Forward is a great slogan because it cuts both ways. This makes two in a row for Barack Obama. His 2008 slogan, “Change we can believe in,” was also a two-sided slogan. With the Republicans in power, John McCain couldn’t exactly advocate “change,” because that would offend his base. The best he could do would be to imply that he would do the job “better than Bush.”
What are the things that went wrong for Obama?
Nothing. The American economy is in bad shape. Deficits are enormous. The Republicans should have won in an easy election, but their marketing strategy was bad.
Which is the brand that you think comes closest to brand Obama?
Virgin might come close because it’s a brand associated with Richard Branson, a unique individual with many stories.
When it comes to brand names the brand name Obama is fairly different from the usual. How does that work/not work?
What many companies forget is that a brand name should be “unique and different.” The biggest mistake companies make is trying to create a brand name that says something about the product or service they are offering. A typical example is “Seattle’s Best Coffee,” a high-end coffee chain launched in America. But the competitor was Starbucks, a unique and different name unrelated to coffee. Starbucks is a far better name than Seattle’s Best Coffee, which is a generic name. Ask people, What is Seattle’s Best Coffee? And they are likely to say, Starbucks.
Could you give us another example from business to substantiate your point?
Google is a typical example. When you start with a unique name without any specific meaning, you can make the name mean whatever you want it to. Yesterday, Google meant nothing. Today, Google means “search” and it’s become one of the most valuable brands in America. On the stock market today, Google is worth $220.1 billion.
How would you define the brand Mitt Romney? What are the three characteristics that you would attribute to him?
Romney is a “business” leader and the attributes voters attribute to him are all based on his business experience. Businesses should (1) Make money. (2) Reduce expenses. (3) Avoid taxes legally.
What is that made brand Romney attractive to the white American male? And what is it that made him unattractive towards everyone else?
The white American male is focused on becoming a business success. He expects to work hard and be rewarded when his hard work pays off. The white American male resents having to share the rewards of his hard work with the government in the form of higher taxes. Women are more family oriented. They don’t mind sharing with less-fortunate individuals. That’s why many of them voted for Barack Obama.
Which is the brand (or even brands) of a product or a service that you think comes closest to brand Romney? And why?
You could list almost every American corporation from IBM to Microsoft. The general perception is that companies want to increase profits, reduce expenses and find a way to avoid taxes (legally.)
You have always said that marketing and branding are all about focus. So who do you think had more focus Obama or Romney? And why?
Barack Obama was focused on just one thing: “Let me finish the job.” That idea was expressed in his slogan “Forward.” Mitt Romney was focused on attacking Obama for the lack of jobs and the high deficits. All true, of course, but that’s a losing political strategy. A politician needs to first have a “positive” focus. I think Mitt Romney should have focused on his business experience and then used a slogan like “Let’s run the government like a business.”
I was reading somewhere that both Obama and Romney employed a technique called brand hijacking in the elections. People who type one candidate’s name into Google’s search box in some markets have seen ads for his opponent. A search for “Barack Obama,” for instance, has yielded ads for Romney, while entering “Mitt Romney” has resulted in ads for Obama. Romney has used a similar tactic on Facebook. How does that help? Would you advocate something like that in the future?
I would not advocate something like this. While it might be effective with some people, it might turn off others.
What are the branding mistakes that Romney make? How difficult was it to beat an incumbent President who was struggling with the economy and most of everything else?
Mitt Romney spent most of his time attacking Barack Obama. That’s the wrong strategy. What a politician needs to do is to offer a positive concept first (business experience) and then point out that his or her opponent lacks this concept. (Barack Obama has never worked in the private sector). It should have been easy to beat an incumbent President with his track record.
I was reading an article on Fast Company and it said “politics, after all, is about marketing — about projecting and selling an image, stoking aspirations, moving people to identify, evangelize, and consume.” Would you agree with something like that and why?
Absolutely. It’s all about perceptions, not reality. That’s what marketing is all about, creating positive perceptions in the minds of consumers.
What are the branding lessons that companies can learn from Obama’s successful campaign?
Years ago, Bill Clinton became famous for running a campaign which his consultants dubbed: “It’s the economy, Stupid.” Today, a company should adopt something similar. It’s what I call the KISS approach. “Keep it simple, Stupid.”
The article originally appeared on www.firstpost.com on November 8, 2012. http://www.firstpost.com/world/why-brand-obama-trounced-misbranded-mitt-romney-518734.html
(Vivek Kaul is a writer. He can be reached at [email protected])
Barack Obama
Obama is good for gold: Target $3,500 by 2013-end?
Vivek Kaul
So now that Barack Obama is all set for a second term as the President of the United States of America, gold is set for another rally. As I write this gold is quoting at $1723.2 per ounce (1 troy ounce equals 31.1grams), up $40 or 2.4% in a day.
And this rally is likely to continue. There are several reasons for the same.
a) The Second Term President phenomenon: Second term presidents in the United States(US) usually tend to go overboard with spending money. This extra spending cannot be always matched by an increase in government revenue and is matched by printing dollars to meet this gap. This money printing devalues the dollar.
As Jan Skoyles the head of research at a U.K. bullion dealer called The Real Asset Co., put it in a recent research note “our research also found Presidents granted a second-term have a marvellous time showing everyone just how much money they can spend, devaluing the currency further and making that precious metal glister even more. It seems that during their first terms Presidents are more tempered than in their second. Is this because they decide to blow the doors off and show everyone what a great person they are, leaving the next guy to pick up the mess?”
And the numbers tell the story. Gold rallied 88.8% during George Bush Junior’s second term. It had rallied only 24.6% in his first term. The same stands true for Bill Clinton as well, with gold losing 5.6% in his first term and gaining 16.9% in his second term. The table here tells the complete story.
b) Democrats destroy the dollar more than Republicans: The Democratic Party to which Obama belongs, has a better track record of destroying the dollar and hence pushing up the gold price. As Skoyles puts it “The evidence showing Democrats destroying the dollar more than Republicans…is over-whelming. Even though Democrats prove to be the best party for gold investors worried about the gold price, the Republicans don’t do too badly themselves – accounting for a net increase of 121.27% across their terms in office since Nixon, versus 358.68% for the Democrats.” Richard Nixon was the President of America between 1969 and 1974.
c) Ben Bernanke will continue to be the Chairman of the Federal Reserve of the United States: One of the things that Mitt Romney, the Republican challenger to Barack Obama, had made very clear was that he would fire Ben Bernanke, the Chairman of the Federal Reserve of the United States, the American central bank, if he became the President of the United States.
As he had said in August earlier this year “I would want to select someone new and someone who shared my economic views…I want someone to provide monetary stability that leads to a strong dollar and confidence that America is not going to go down the road that other nations have gone down, to their peril.” His running mate, Paul Ryan wanted dollar to be “Sound Money” again. “We want to pursue a sound-money strategy so that we can get back the King Dollar,” Ryan said.
With Obama getting a second term, Ben Bernanke is likely to continue as the Chairman. Also he might now even get a third term when his current term ends in 2014. This means that the easy money policy run by the Federal Reserve is likely to continue and this can only mean good things for the price of gold.
Bernanke has been running a policy of quantitative easing and printing dollars, in the hope that banks lend these dollars, and people spend them, and this in turn helps in the revival of the American economy. But this money printing has also led to a stupendous rise in the price of gold.
Any round of quantitative easing ensures that there are more dollars in the financial system than before. The threat is that the greater number of dollars will chase the same number of goods and services. This will lead to an increase in their prices. But this hasn’t happened till now. Nevertheless that hasn’t stopped investors from buying gold to protect themselves from this debasement of money. Gold cannot be debased. Unlike paper money it cannot be created out of thin air.
During earlier days, paper money was backed by gold or silver. When governments printed more paper money than the precious metals backing it, people simply turned up with their paper at the central bank and government mints, and demanded that paper money be converted into gold or silver. Now, whenever people see more and more of paper money being printed, the smarter ones simply go out and buy that gold. Hence, bad money (that is, paper money) is driving out good money (that is, gold) away from the market.
d) The US Fed will go slow on manipulating the gold market: Another theory going around is that the US Federal Reserve has been manipulating the price of gold over the years with help from bullion banks. As the gold expert Tehmaas Gorimaar writes “One form of manipulation is the through setting of low lease rates for gold and silver. Low rates encourage bullion banks like J.P Morgan and HSBC to borrow gold and silver from central banks, dump the metal on the market and use the proceeds to invest in paper assets, thereby driving up the prices of these assets.” (you can read a more detailed argument on this here).
This manipulation to hold back the price of gold seems to have gone up in the run up to the Presidential election. As Gorimaar puts it“Because the dollar, like all other currencies, is a fiat currency, and gold is the antithesis of the dollar. A runaway gold price means that the so called “strong dollar policy” touted by American presidents isn’t working. Also, higher gold and a lower dollar would mean higher commodity prices, since commodities are priced in dollars. A weak dollar would also have given Mitt Romney more fodder for attack.” Hence, Bernanke was helping Obama here. Now what would be the quid pro quo for the same? Another term for Bernanke as the Chairman?
With the elections over the Federal Reserve is likely to take a breather on this front and gold is set to rally. “I think you’ll see gold at $3500 per ounce and silver above $100 per ounce by the end of 2013. This is because of the extreme suppression of their prices in this election year,” says Gorimaar.
e) Does that mean gold will rally in India? While the gold is set to rally in dollars, for Indians to make money it has to rally in rupee terms. For that to happen the Indian rupee either has to remain at the current levels against the dollar or depreciate further. Let us try and understand this through an example. Gold currently quotes at around $1723 per ounce. One dollar is worth Rs 54.3. This means one ounce of gold is priced at Rs 93558.9 per ounce (one troy ounce equals 31.1grams). If one dollar was worth Rs 50, then gold would have been at Rs 86,150 per ounce. If one dollar was worth Rs 60, gold would have been at Rs 1.03,380 per ounce. Hence more the rupee depreciates against the dollar; the greater will be the return on gold in rupee terms. For that to happen the UPA government needs to continue running the screwed up economic policy that it has been over the last few years. And that’s one thing they have been doing even better than all the scams that they have been running. So gold should rally in rupee terms as well.
The article originally appeared on www.firstpost.com on November 7, 2012. http://www.firstpost.com/economy/obama-is-good-for-gold-target-3500-by-2013-end-517752.html)
(Vivek Kaul is a writer. He can be reached at [email protected])
Why you should be nice to your mom – and buy some gold
Vivek Kaul
So let me start this piece by admitting Ben Bernanke, the Chairman of the Federal Reserve of United States (the American central bank) has proven me wrong.
I was wrong when I recently said that the Federal Reserve would not initiate a third round of quantitative easing (QE), before the November 6 presidential elections in the United States. (you can read about it here).
Bernanke announced late last night that the Federal Reserve would buy mortgage backed securities worth $40billion every month. This will continue till the job scenario in the United States improves substantially. The Federal Reserve will print money to buy the mortgage back securities.
I concluded that the Federal Reserve wouldn’t announce any QE till November 6, primarily on account of the fact that Mitt Romney, the Republican nominee for the Presidential elections, has been against any sort of QE to revive the economy.
“I don’t think QE-II was terribly effective. I think a QE-III and other Fed stimulus is not going to help this economy…I think that is the wrong way to go. I think it also seeds the kind of potential for inflation down the road that would be harmful to the value of the dollar and harmful to the stability of our nation’s needs,” Romney told Fox News on 23 August. This had held back the Federal Reserve from initiating QE III.
But from the looks of it Bernanke doesn’t feel that Romney has a chance at winning and that he is more likely than not going to continue working with Barack Obama, the current American President.
This round of quantitative easing is going to help Obama and hurt Romney. Let me explain. The theory behind quantitative easing is that when the Federal Reserve buys mortgage backed securities (in this case) by printing dollars, it pumps in more money into the economy. With more money in the economy, banks and financial institutions it is felt will lend that money and businesses and consumers will borrow. This will mean that spending by both businesses and consumers will start to up. Once that happens the economic scenario will start improving, which will lead to more jobs being created.
But as I said this is the theoretical part. And theory and practice do not always go together. Both American businesses and consumers have been shying away from borrowing. Hence, all this money floating around has found its way into stock and commodity markets around the world.
As more money enters the stock market, stock prices go up and this creates the “wealth effect”. People who invest money in the market feel richer and then they tend to spend part of the accumulated wealth. This, in turn, helps economic growth.
As Gary Dorsch, an investment newsletter writer, said in a recent column, “Historical observation reveals that the direction of the stock market has a notable influence over consumer confidence and spending levels. In particular, the top 20% of wealthiest Americans account for 40% of the spending in the US economy, so the Fed hopes that by inflating the value of the stock market, wealthier Americans would decide to spend more. It’s the Fed’s version of “trickle down” economics, otherwise known as the “wealth effect.””
When this happens, the economy is likely to grow faster and hence, people are more likely to vote for the incumbent President. As Dorsch explains “Incumbent presidents are always hard to beat. The powers of the presidency go a long way…In the 1972 election year, when Nixon pressured Arthur Burns, then the Fed chairman, to expand the money supply with the aim of reducing unemployment, and boosting the economy in order to insure Nixon’s re-election.”
Bernanke is looking to do the same, even though he has denied it completely. “We have tried very, very hard, and I think we’ve been successful, at the Federal Reserve to be non-partisan and apolitical…We make our decisions based entirely on the state of the economy,” the Financial Times quoted Bernanke as saying. Given this, Romney has been a vocal critic of quantitative easing knowing that another round of money printing will clearly benefit Obama.
Other than Obama and the stock markets, the other big beneficiary of QE III will be gold. The yellow metal has gone up by around 2.2% to $1768 per ounce, since the announcement for QE III was made. In fact the expectation of QE III has been on since the beginning of September after Ben Bernanke dropped hints in a speech. Gold has risen by 7.3% since the beginning of this month.
This is primarily because any round of quantitative easing ensures that there are more dollars in the financial system than before. The threat is that the greater number of dollars will chase the same number of goods and services. This will lead to an increase in their prices. But this hasn’t happened till now. Nevertheless that hasn’t stopped investors from buying gold to protect themselves from this debasement of money. Gold cannot be debased. Unlike paper money it cannot be created out of thin air.
During earlier days, paper money was backed by gold or silver. When governments printed more paper money than the precious metals backing it, people simply turned up with their paper at the central bank and government mints, and demanded that paper money be converted into gold or silver. Now, whenever people see more and more of paper money being printed, the smarter ones simply go out and buy that gold. Hence, bad money (that is, paper money) is driving out good money (that is, gold) away from the market.
But that’s just one part of the story. The governments and central banks around the world, led by the Federal Reserve of United States and the European Central Bank, are likely to continue printing more money, in the hope that people spend this money and this revives economic growth. This in turn increases the threat of inflation which would mean that the price of gold is likely to keep going up. “Gold tends to benefit from easy-money policies as investors utilize the precious metal as a hedge against potential inflation that could ultimately result from the Fed’s policies,” Steven Russolillo, wrote on WSJ Blogs.
Market watchers have also started to believe that the Federal Reserve is now only bothered about economic growth and has abandoned the goal of keeping inflation under control. Growth and inflation control are typically the twin goals of any central bank.
“They are emphasizing the growth mandate, and that means they don’t care about inflation other than giving lip service to it,” Axel Merk, chief investment officer at Merk Funds, told Reuters. “The price of gold will do very well in the years to come,”he added.
Something that Jeffrey Sherman, commodities portfolio manager of DoubleLine Capital, agrees with. “The Fed’s inflationary behavior should be bearish for the dollar in the long run and drive investors to seek protection via the gold market,” he told Reuters.
Also unlike previous two rounds of money printing there are no upper limits on this QE, although at $40billion a month it’s much smaller in size. QE II, the second round of money printing, was $600billion in size.
Something that can bring down the returns on gold in rupee terms is the appreciation of the rupee against the dollar. Yesterday the rupee appreciated against the dollar by nearly 2%. This is happening primarily because the UPA government has suddenly turned reformist. (To understand the complete relationship between rupee, dollar and gold, read this).
In the end let me quote William Bonner & Addison Wiggin, the authors of Empire of Debt — The Rise of an Epic Financial Crisis. As they say “There is never a good time to die. Nor is there a good time for a crash or a slump. Still, death happens. Be prepared. Say something nice to your mother. Offer a bum a drink. And buy gold.”
So be nice to your mother and buy gold.
Disclosure: This writer has investments in gold through the mutual fund route.
(The article originally appeared on www.firstpost.com on September 15,2012. http://www.firstpost.com/investing/why-you-should-be-nice-to-your-mom-and-buy-some-gold-456915.html)
(Vivek Kaul is a writer. He can be reached at [email protected])
The truth Obama didn’t tell his party: The US is broke
Vivek Kaul
When Manmohan Singh speaks he puts us to sleep.
When Barack Obama speaks the world listens. In his speech to accept the nomination to run for his second term as President, Obama touched all the right chords. The speech had the right amount of nostalgia, advise, self marketing and hope built into it.
His vision of future, as is the case with anyone asking for votes in a democracy, was optimistic, without getting into the specifics. The American dream is still on, despite the difficulties the country has faced over the last five years due to the financial crisis. That was the takeaway, one got from Obama’s speech.
“But as I stand here tonight, I have never been more hopeful about America. Not because I think I have all the answers. Not because I’m naïve about the magnitude of our challenges. I’m hopeful because of you,” said Obama
While hope is a good thing to have but then at times to hope we need to ignore the mess that we are in, in order to have some hope. And that precisely is my problem with Obama’s speech. There was a lot that he should have said, but did not.
The biggest problem in America today is not unemployment or slow economic growth but the unfunded liabilities like pensions, social security and medical care benefits that the government has promised to the citizens. .
As economist Laurence Kotlikoff wrote in a recent column “The 78 million-strong baby boom generation is starting to retire in droves. On average, each retiring boomer can expect to receive roughly $35,000, adjusted for inflation, in Social Security, Medicare, and Medicaid benefits. Multiply $35,000 by 78 million pairs of outstretched hands and you get close to $3 trillion per year in costs. This is not a partisan issue. The dirty little secret that neither President Obama nor Mitt Romney is telling you is that our kids, who are being stuck with the bill, can’t afford it.”
The three trillion dollars that Kotlikoff is talking about is a lot of money. The current American yearly GDP is $15trillion. Hence, the costs Kotlikoff is talking about amount to nearly 20% of the annual American GDP. And it is unfunded.
Before we go further let’s try and understand what unfunded liabilities are. Let us say I plan to retire 10 years from now. I feel that Rs 16 lakh per year should be enough for me to sail through the year. But to earn that Rs16 lakh I would need to build a corpus of Rs 2 crore in 10 years time, and assuming that I am able to earn an interest of 8% on this corpus, 10 years from now (8% of Rs 2crore works out to Rs 16 akh).
In order to build a corpus of Rs 2 crore in 10 years time I will have to start saving and investing money regularly from now. If I don’t I will be in trouble ten years from now. Either I won’t be able to retire or if I retire I will have to borrow to meet my expenses.
The same logic at a very basic level works for governments as well. The government gives a pension to people when they retire. If a certain number of people are expected to retire ten years from now, then they would have to be paid a certain amount of pension. While estimating the exact amount is difficult, estimates can be made. But what we know for sure is that money is to be saved now so that citizens can be paid pensions later.
If governments don’t invest the right amount from now on, which a lot of them don’t including the US government, they will have to pay these citizens by borrowing money later. And if pensions and other commitments made to the citizens cannot be funded through the investments already made, they are said to be ‘unfunded’.
Mitch Feierstein in his book Ponzi Power – How Politicians and Bankers Stole Your Future writes “Using proper accounting methods…the true value of the state and municipal pension liability is at $5.2trilion. When you deduct the $1.94trillion of pension assets that have already been set aside, you get a net liability of $3.26trillion.”
Other than this the US government already has an existing debt of around $15trillion. Feierstein also points out that the social security programme of the US government is underfunded to the extent of $18.8trillion. The underfunding in Medicare, the health insurance programme, amounts to around $38.5trillion. So if you add all of this up the number comes to greater than $75 trillion and that is what Feierstein feels the US government owes to other governments and its own citizens.
And that’s just one estimate and a very conservative one. Kotlikoff’s estimate is scarier. As he wrote in a recent column “I recently calculated the fiscal gap…The fiscal gap measures the present value difference between all projected future federal expenditures (including servicing official debt) and all projected future taxes. The fiscal gap is thus the true measure of our government’s total indebtedness and the true measure of fiscal sustainability. How big is the fiscal gap? Brace yourself. It’s $222 trillion large!… In short, our government is totally broke. And it’s not broke in 30 years or in 20 years or in 10 years. It’s broke today.”
So how large is $222trillion? The annual GDP of the whole world is around $60trillion. The GDP of the United States of America is around $15trillion.
So what is the way out of this? “Here’s one way to wrap your head around our $222 trillion fiscal hole: closing it via tax hikes would require an immediate and permanent 64 percent increase in all federal taxes. Alternatively, the government could cut all transfer payments, e.g., Social Security benefits, and discretionary federal expenditures, e.g., defense expenditures, by 40 percent. Waiting to raise taxes or cut spending makes these figures worse,” writes Kotlikoff.
Another way out for the American government is to print money to meet its expenses (something which is it is already doing). As Kotlikoff puts it another column “The first possibility is massive benefit cuts visited on the baby boomers in retirement. The second is astronomical tax increases that leave the young with little incentive to work and save. And the third is the government simply printing vast quantities of money to cover its bills. Most likely we will see combination of all three responses with dramatic increases in poverty, tax, interest rates and consumer prices. This is an awful, downhill road to follow, but it’s the one we are on. And bond traders will kick us miles down our road once they wake up and realize the U.S. is in worse fiscal shape than Greece.”
If America has to get out of this hole, the American way of life has to change. And that as Obama’s speech clearly points out is unlikely to happen.
(The article originally appeared on www.firstpost.com on September 8,2012. http://www.firstpost.com/world/the-truth-obama-didnt-tell-his-party-the-us-is-broke-448686.html)
(Vivek Kaul is a writer. He can be reached at [email protected])
Obama, Salman Khan, QE-3: Why we have to wait for 6 Nov
Vivek Kaul
Richard Nixon, who was the President of the United States between January 1969 and August 1974, appointed Arthur C Burns as the Chairman of the Federal Reserve of United States (the American central bank) on January 30,1970. “I respect his (i.e. Burns) independence. However, I hope that independently he will conclude that my views are the ones that should be followed,” Nixon said on the occasion.
Burns did not disappoint Nixon and when it was election time in 1972. Since the start of 1972, Burns ran an easy money policy and pumped more money into the financial system by simply printing it. The American money supply went by 10.6% in 1972.
The idea was that with the increased money in the financial system, interest rates would be low, and this would encourage consumers and businesses to borrow more. Consumers and businesses borrowing and spending more would lead to the economy doing well. And this would ensure the re-election of Nixon who was seeking a second term in 1972. That was the idea. And it worked. Nixon won the second term with some help from Burns.
As investment newsletter writer Gary Dorsch wrote in a column earlier this year “Incumbent presidents are always hard to beat. The powers of the presidency go a long way….Nixon pressured Arthur Burns, then the Fed chairman, to expand the money supply with the aim of reducing unemployment, and boosting the economy in order to insure Nixon’s re-election…Nixon imposed wage and price controls to constrain inflation, and won the election in a landslide.” (you can read the complete column here)
History is expected to repeat itself
Something similar has been expected from the current Federal Reserve Chairman Ben Bernanke. It has been widely expected that Bernanke will unleash the third round of money printing to revive the moribund American economy. Bernanke has already carried out two rounds of money printing before this to revive the American economy. This policy has been technically referred to as quantitative easing (QE), with the two earlier rounds of it being referred to as QE I and QE II.
The original idea was that with more money in the economy, banks will lend, and consumers and businesses will borrow and this in turn would revive the economy. But the American consumer had already borrowed too much in the run up to the financial crisis, which started in September 2008, when the investment bank Lehman Brothers went bust. The consumer credit outstanding peaked in 2008 and stood at $2.6trillion. The American consumer had already borrowed too much to buy homes and a lot of other stuff, and he was in no mood to borrow more.
The wealth effect
The other thing that happened because of the easy money policy of the American government was that it allowed the big institutional investors to borrow at very low interest rates and invest that money in the stock market. This pushed stock prices up leading to more investors coming into the market.
As Maggie Mahar puts it in Bull! : A History of the Boom, 1982-1999: What drove the Breakneck Market–and What Every Investor Needs to Know About Financial Cycles: “In the normal course of things, higher prices dampen desire. When lamb becomes too dear, consumers eat chicken; when the price of gasoline soars, people take fewer vacations. Conversely, lower prices usually whet our interest: colour TVs, VCRs, and cell phones became more popular as they became more affordable. But when a stock market soars, investors do not behave like consumers. They are consumed by stocks. Equities seem to appeal to the perversity of human desire. The more costly the prize, the greater the allure.”
As more money enters the stock market, stock prices go up. This leads to what economists call the “wealth effect”. The stock market investors feel richer because of the stock prices going up. And because they feel richer they tend to spend some of their accumulated wealth on buying goods and services. As more money is spent, businesses do well and so in turn does the economy.
As Gary Dorsch writes “Historical observation reveals that the direction of the stock market has a notable influence over consumer confidence and spending levels. In particular, the top-20% of wealthiest Americans account for 40% of the spending in the US-economy, so the Fed hopes that by inflating the value of the stock market, wealthier Americans would decide to spend more. It’s the Fed’s version of “trickle down” economics, otherwise known as the “wealth effect.”
Why Bernanke won’t launch QE III soon
Given these reasons it was widely expected that Ben Bernanke would start another round of money printing or QE III this year to help Obama’s reelection campaign. Bernanke has been resorting to what Dorsch calls “open mouth operations” i.e. dropping hints that QE III is on its way. In August he had said that the Federal Reserve “will provide additional policy accommodation as needed to promote a stronger economic recovery.” This was basically a complicated way of saying that if required the Federal Reserve wouldn’t back down from printing more money and pumping it into the economy.
But even though Bernanke has been hinting about QE III for a while he hasn’t gone around doing anything concrete about it. The reason for this is the fact that Mitt Romney, the Republican candidate against the incumbent President Barack Obama has gone to town criticizing the Fed’s past QE policies. He has also warned the Federal Reserve to stay neutral before the November 6 elections, says Dorsch. As Romney told Fox News on August 23 “I don’t think QE-2 was terribly effective. I think a QE-3 and other Fed stimulus is not going to help this economy…I think that is the wrong way to go. I think it also seeds the kind of potential for inflation down the road that would be harmful to the value of the dollar and harmful to the stability of our nation’s needs.”
Romney even indicated that he would prefer someone other than Bernanke as the Chairman of the Federal Reserve. “I would want to select someone new and someone who shared my economic views…I want someone to provide monetary stability that leads to a strong dollar and confidence that America is not going to go down the road that other nations have gone down, to their peril.” With more and more dollars being printed, the future of the dollar as an international currency is looking more and more bleak.
Romney’s running mate Paul Ryan also echoed his views when he said “Sound money… We want to pursue a sound-money strategy so that we can get back the King Dollar.”
Given this it is highly unlikely that Ben Bernanke will unleash QE III before November 6, the date of the Presidential elections. And whether he does it after that depends on who wins.
Of Obama and Salman Khan
As far as pollsters are concerned Obama seems to have the upper hand as of now. But at the same time the average American is not happy with the overall state of the American economy. “According to pollsters, two thirds of Americans think the US-economy is still stuck in the Great Recession, and is headed in the wrong direction. Only 31% say it is moving in the right direction – the lowest number since December 2011. The dire outlook is explained by a recent analysis by the US Census Bureau and Sentier Research LLC, indicating that US-household incomes actually declined more in the 3-year expansion that started in June 2009 than during the longest recession since the Great Depression,” writes Dorsch.
But despite this Americans don’t hold Obama responsible for the mess they are in. As Dorsch points out “Although, Americans are increasingly pessimistic about the future, many voters don’t seem to be holding it against Democrat Obama. Instead, the embattled president is getting some slack because he inherited a very tough situation. In fact, Obama’s strongest base supporters are among also suffering the highest jobless rates and highest poverty rates in the country.”
Obama’s support is similar to the support film actor Salman Khan receives in India. As Manoj
Manoj Desai, owner of G7 theatres in Mumbai, recently told The Indian Express “Even when the fans are disappointed with his film, they never blame him. You will often hear them say, bhai se galat karwaya iss picture main. (They made Bhai do the wrong things in this movie)”
What’s in it for us?
Indian stock market investors should thus be hoping that Barack Obama wins the November 6 elections. That is likely to lead to another round of quantitative easing. As had happened in previous cases a portion of that matter will be borrowed by big Wall Street firms and make its way into stock markets round the world including India.
(The article originally appeared on www.firstpost.com on September 5,2012. http://www.firstpost.com/world/obama-salman-khan-qe-3-why-we-have-to-wait-for-6-nov-444474.html)
(Vivek Kaul is a Mumbai based writer and can be reached at [email protected])