The Politics of Fear

Story Highlights:

• Politicians using fear to push their agenda is a common practice that’s easy to see these days.
• To have a truly constructive and instructive conversation about debt, separating fear from fact is critical.

If there’s one thing—and only one thing—US politicians seems to be able to agree on right now, it’s the use of fear-based rhetoric in making their argument regarding the debt limit increase.

Last night, President Obama took to the airwaves in order to take his case to the people. And, as politicians frequently do, his rhetoric hinged on an emotional call to lift the ceiling or else calamity would ensue past August 2. In recent weeks, Treasury Secretary Timothy Geithner has done similarly—claiming the US would default on its “obligations” if the limit weren’t raised.

But hold your horses. With all due respect to Mr. Geithner, it seems we disagree on the terms “default” and “obligations” as they’re used here. As we’ve written previously, default is a very specific term as it pertains to bond markets. And as far as bond markets are concerned, obligations represent interest and principal.

The US takes in sufficient revenue to cover interest (principal is a non-issue, since debt can be rolled over without breaching the ceiling). In fact, the expected deadline is already in question by several analysts who note stronger-than-expected revenue in July to date (which is fairly normal in an expansion). The US is expected to receive roughly $172 billion in tax revenue in August. Interest amounts to roughly $29 billion. It’s estimated the remainder can easily cover Social Security, Medicare, Medicaid, military pay, Department of Defense contractors and IRS refunds—and still have cash left. But in political-speak, apparently, “defaulting on our obligations” can mean virtually anything goes unpaid—like the salaries of congressmen and senators (though we strongly doubt most Americans would think that a disastrous default).

Don’t think invocations of doom are limited to the blue side of the aisle. As for Republicans, they frequently bang the doom drum in discussing the long-term future implications of debt and entitlement programs. We agree the US shouldn’t go hog-wild with deficit spending, but invoking “our grandchildren’s futures” is just an attempt to morph a rational and worthwhile fiscal debate into an emotional polemic. (Interestingly, when people talk about “your share of the national debt,” no one mentions “your share of national assets.”)

If a truly rational conversation about debt, deficits and entitlement programs is desired, step one is to eliminate the fear-based rhetoric. Step two is to assess the true benefits and costs of this spending. But the US rarely reaches that point since few politicians seem to be able to pass step one.

Playing up fear to try to garner popular support is a long-standing political ploy that recent years have done nothing to eliminate. While we wish US politicians were above this and could simply focus on facts and making rational decisions, the reality is they’re far more focused on saying whatever they think will serve them well come the next election. For markets, this fear can create volatility in the very near term, but is highly unlikely to do much more than that.

On an unrelated note, below are a few articles we’ve written for third party websites of late. Here are some links—enjoy.

Trade is Trucking Along (iStockAnalyst, July 8, 2011.)

The US and Mexican governments reached an agreement Wednesday to lift tariffs and a ban against Mexican truck deliveries in the US—Fisher Investments believes this is another win for free trade and both countries.

https://www.istockanalyst.com/finance/story/5281337/trade-is-trucking-along-says-fisher-investments

Addressing the Growing Fracas Over Fracking (RealClearMarkets, July 7, 2011.)

The media seems to be fighting increasingly hostile wars over hydraulic fracturing. But extant data make a few points clear.

https://www.realclearmarkets.com/articles/2011/07/11/energy_addressing_growing_the_fracas_
over_fracking_99118.html

Retail Therapy (Yahoo!, July 15, 2011.)

Retail sales trounced expectations in June—even though consumers said they’d spend less.

High Unemployment Shouldn’t Hinder Equities/Growth (Real Clear Markets, July 18, 2011.)

High unemployment remains a major headline grabber—with the implication that ongoing high unemployment is a material economic negative. But unemployment metrics aren’t predictive of future economic health.

https://www.realclearmarkets.com/articles/2011/07/18/high_unemployment_shouldnt_hinder_
equitiesgrowth_99130.html

Energy Equipment and Services: Four Positive Drivers (Morningstar, July 8, 2011.)

The Energy Equipment and Services industry has a solid foundation for future growth.

https://news.morningstar.com/articles/perspectives/121232/fisher-investments-view-on-energy-equipment-and-services-four-positive-drivers.aspx