How the US Can Rebuild Trust

03/25/2011 12:55 pm EST

Focus: MARKETS

Gillian Tett

US Managing Editor, Financial Times

Clearly the United States faces a few fundamental problems with its debt and political headwinds. But a good part of what’s needed to recover faith and confidence in the global markets is simply time, as Gillian Tett, US managing editor of the Financial Times, says in this exclusive interview with MoneyShow.com.

I was looking at restoring the credit and the trust in the markets. What is your view on that? Can we do so?

Well, the good news is that trust has certainly recovered to a certain degree since 2008—when investors very much lost faith in most of the markets and most financial institutions—so there is certainly a much calmer atmosphere now.

The problem is, though, that when trust has been shattered in any walk of life, it takes a long time to be restored. I would say there’s a certain amount of fragility in today’s financial markets that’s not going to go away soon.

What will that do to growth in this recovery?

It’s very telling that right now, you have US corporations sitting on around $2 trillion worth of spare cash. If you ask them why they aren’t spending, it’s partly because there is this tremendous climate of uncertainty.

Now, people can blame that on the US government, on regulation uncertainty, or about people being fed up with the political squabbling in Washington, but there are also some very good economic reasons why businesses are uncertain.

You have tremendously significant structural challenges in the US economy. You’ve also got potential for considerable dislocation in the global economy. When you look at say what’s happening between the US and China, or the Eurozone.

Because of trade wars, because of currency problems, which?

It’s pretty clear to most people that the current situation can’t continue indefinitely, where China is essentially financing the US and you have essentially a fixed Chinese exchange rate. So, sooner or later, something is going to have to give.

And I think the issue that many businesses and many investors are facing right now is that we’ve lived through a period where we’ve had to become reacquainted with credit risk, with counterparty risk, with liquidity risk.

We now have to become reacquainted with political risk or other geo-political risk, and the question people are looking at is what geopolitics is going to do to confidence going forward, as well.

Is it your view, that we’ll still muddle through, that Western markets will continue to ascend?

In the short-term, I think the sheer amount of liquidity that’s swirling around the financial markets—and the amount of help that the Federal Reserve has provided—will probably create quite a lot of froth.

We’re already seeing that in how the stock market is behaving. That could go on for quite a long time.

But in the longer term, the really big question is what’s going to happen when they start withdrawing some of that stimulus. And right now, I think that’s very uncertain.

Very interesting. Inflation?

Inflation is fascinating right now, because it was quite recently people were talking about deflation, and all of a sudden everyone is talking about inflation—and if you talk to investors and financial experts, it’s quite stunning, the polarity of views about where we’re heading right now.

Personally speaking, I think that it’s quite possible we’ll continue with subdued prices for awhile, but inflation could pretty quickly rear its head.

The big question that people should be asking right now is to what degree are investors hedged, or prepared for a world of higher inflation and potentially higher rates? And to what degree is the financial system hedged against that?

If you look at what’s been happening with small- to medium-sized banks in the US recently, they’ve been buying a lot of Treasury bonds, a lot of muni bonds—and if the price of those bonds fall, if inflation goes up, that could leave them pretty exposed.

Indeed it could. On the other hand, ascending asset prices is the kind of thing that lenders are looking for, as opposed to declining asset values on their balance sheets. I guess that’s been the biggest issue, is the balance-sheet recession we found ourselves in.

Absolutely. I mean, the balance-sheet recession is a lot easier to handle with inflation—not deflation. I was in Japan in the late 1990s, and certainly whenever you got prices going down there, loans get bigger—relatively speaking—day by day, and that’s tough.

So there is a tremendous incentive right now for the political system to essentially tolerate, if not create, some low inflation—and frankly, moderate inflation would perhaps not be a bad thing.

The problem is that history shows that it’s jolly hard to keep inflation moderate for any period of time. It has a nasty habit of running away with you—particularly when you have a global economy as tightly entwined as we do today, but also marred by some fundamental imbalances which thus far have not been addressed.

What could we do to address the imbalances?

Unfortunately, what’s needed right now is some form of global commitment, between the G7, the G2, ideally the G20.

It really does boil down to an awful lot of hard talk about currencies, about persuading the countries which are currently large creditors to start consuming more at home—but also, serious commitment on the part of the US government to try to tackle its medium- to long-term structural problems.

You don’t have to start cutting debt in America immediately, but you do need to show the markets, and the Chinese, and other creditors that you do have a plan for the medium to long term. Right now that hasn’t been forthcoming, partly because the challenge hanging over America today is not so much economic, it’s political too. 

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