Digging In

In America today, the private sector met the public sector, at the White House. And, in the Middle East, as a prelude to the Washington gathering, Israel decided to retaliate against Hamas in the Gaza Strip. It launched air attacks that killed, among others, the military commander of Hamas, Ahmed al-Jabari. Egypt reacted by recalling its Ambassador to Israel. Markets, hardly needing any more reason to worry, sold off.

In Washington, certain corporate CEO members of the Fix The Debt coalition were invited to meet today with President Obama who, just prior to the meeting, reiterated, at a press conference, that, in addressing the impending fiscal cliff,  he would not under any circumstances agree to extend the Bush tax rate cuts across the income spectrum. Still savoring his re-election (by, compared with 2008, a much smaller 2.4 percentage points of the popular vote), the President apparently decided that the way to reach out to Republicans in the House was to aggressively dig in. Perhaps this was simply an opening negotiating tactic, but, to this writer, it seemed more like a "fire away and damn the consequences" approach,  a curious way to re-start a process of bi-partisan fiscal compromise. Having met with union and civic officials at the beginning of this week, and then today with business leaders, the President moves on to Congressional leaders of both parties on Friday.  Time is precious at this point. The fiscal cliff - some $700 billion of tax increases and spending cuts, amounting to a nearly 5% reduction of GDP over a full year - will kick in January 1. America needs to reduce its deficit, but not so abruptly as to induce another recession. Watch for very skittish markets, at least until a deal is done.

First Quadruple, Then Double?

Under its current leader, Hu Jintao, the size of China's economy has quadrupled (in dollar terms) in the decade 2002-2012. Over the same period, it has moved from 5th to the biggest exporter in the world, ahead of the entire 27-nation European Union (2nd) and mighty Germany (3rd). It has displaced Japan as the world's 2nd largest economy. Some form of health care is now nearly universal in China, compared with 15% ten years ago, and even its rural poor are covered, however still modestly, by a pension scheme. China's global influence has surged, effectively just behind America's, whether it concerns climate change, or development in Africa, or even resource development in Western nations like Canada. New planning emerging from Beijing aims for a further doubling of the economy by 2020. And on it goes - seemingly relentlessly.

But, as with the apparently "unstoppable Japan" in the 1980's, extrapolation of current trends is often misleading, or just wrong. Here's the challenge for China - continued economic growth will more than ever depend on the government's ability to maintain political stability. The 18th National Congress of the Chinese Communist Party will this week introduce its new leader, Xi Jinping, who next March will also assume the country's presidency. This is a once-every-ten-years (whether it's needed or not) leadership change, the result of a process that, to understate it, is opaque. Ordinary Chinese are richer, now protest in public, write critically, and comment through burgeoning social media, but have had no role at all in the selection. At some point, will public resentment - over inequality, environmental destruction, official corruption, or just no means of political input - explode?  Will one-party Communism in China finally go the way of its counterpart in Soviet Russia and Eastern Europe?

Economic history suggests that the process of economic maturity is often accompanied, sooner or later, by the emergence of democratic expression. Watch for this to happen again, this time in China.

More Austerity, Strikes, Recession and Loans

With the US elections out of the way, the economic angst meter has shifted its attention. New concern is focused this time on both ends of the Euro zone spectrum - Greece and Germany.

Yesterday, the ever-more-fragile Greek coalition government once again ratcheted up austerity. The Greeks themselves were outside their parliament buildings, striking and protesting. Inside, their representatives were "debating" (for a day), then passing (barely, by 153 votes out of 300) more spending cuts and tax increases. Prime Minister Samaras said his government's bank account would be empty of euros by November 16. So this further fiscal tightening was an urgent, necessary condition for the release of the next $40 billion bailout tranche from the so-called troika of lenders (the European Union, the European Central Bank, and the IMF). A necessary, but not sufficient, condition - the next vote required for freeing up the loan installment is scheduled for November 12, when Euro Finance Ministers must approve it. No one is expecting a rubber-stamping - German Finance Minister Schaeuble stated today that he will not even vote until the troika's latest audit of Greek finances is available. Watch for some "interim financing" to avert a complete collapse - and more protesting in Athens' streets.

As Greece sinks further, Germany - regarded as the Euro engine and ultimate source of Euro financing - is faltering. After expanding 3-4% in each of the years 2010 and 2011, growth has nearly stalled this year. The real concern is that the economy looks to actually contract this quarter and into next year, with industrial production and new orders dropping in September, German business sentiment worsening, and unemployment rising.

Ms. Merkel's political balancing act - between German electorate bailout fatigue, on the one hand, and, on the other, seemingly unending requests (read Greece, Spain and even Italy) for financial assistance - just keeps getting more difficult.

Opening Doors

Republican Speaker Boehner addressed the House this afternoon. Like the rest of the world, the US fiscal cliff was clearly on his mind, as it is with the US equity markets. He was conciliatory towards the Democrats, indicating higher tax revenues would be acceptable as part of an overall agreement of tax reform and deficit reduction. Words worth noting.

The equity markets didn't buy it - they weakened further in the last hour of trading today, right after Boehner's comments.

Cynicism, understandably, persists. Let's watch President Obama.

Unchanged?

After all the rallies, debates and ads, after all the noise, falsehoods and money, the political landscape in America is essentially the same this morning as it was yesterday. Democracy can be odd and messy.

President Obama won 303 electoral votes (perhaps more, depending on the outcome in Florida), comfortably above the 270 required to win, because he won two major "swing" states (Virginia and Ohio), which did not swing from their positions in 2008. He is leading, barely, in the other big swing state - Florida (here's a surprise - the closeness of the Florida result may trigger a re-count), and he won Pennsylvania, which the Romney camp actually thought might swing. The President also prevailed despite a few minor swing states, such as North Carolina and Indiana, that did swing - towards Mr. Romney. The popular vote was, as polls were suggesting, much closer than in Obama's 2008 victory. Tellingly, especially for immigration policy, Mr. Romney won only 27% of the Latino vote (George Bush won 40% in 2004). Watch for a major policy initiative on immigration coming out of Obama's second term.

Yesterday's Congressional elections have left the balance of power unchanged as well. The House is still controlled by Speaker Boehner's Republicans (even though a few first-term tea partiers were turfed), and the Democrats, under Harry Reid, continue to rule the Senate.

So, does all this indicate that gridlock persists? Does the country inevitably fall over the impending fiscal cliff? The hope is that Mr. Obama, refreshed with another four-year mandate that this time he cannot renew, really will "reach across the aisle", as he said he will in his acceptance speech last night. And let's also hope he stops bashing business. As for the House Republicans, the hope is they start listening to business leaders, and to Mr. Simpson and Mr. Bowles, all of whom realize that America cannot continue to tax as though it were running a small government.

Early this morning, the markets welcomed the clarity of the election results, with the futures indicating a positive open at 9:30. No longer - Europe is back, with Mario Draghi  (the head of the European Central Bank)  pointing out that even the German economy is faltering. The Dow futures are down over 100 points.....