By Dock David Treece.
Of all the obstacles to economic growth, uncertainty is undoubtedly the most hindering. Uncertainty about policy, prices, armed conflict, even weather; the more uncertainty that exists in an economic system, the worse it is for growth.
When uncertainty is prevalent, business leaders can’t make decisions based on reliable forecasts. In some instances they can’t depend on consistent government policy (as is the case today); other times they can’t know whether they have dependable sources of natural resources. All of these things dictate the framework within businesses and their leaders must operate; and a shaky framework prevents leaders from having the confidence they need to grow.
Consider Obamacare only as one example. Like the concept or not, the Affordable Care Act has probably been the single worst-handled piece of American legislation in the past half-century. It has also been one of the most far-reaching, directly impacting more than 15% of the US economy along with every major employer.
Democratic-led healthcare reform (post-Bill Clinton Presidency) was first floated as a concept during the 2008 primaries, but business leaders were unsure whether it would be pursued. They were also unsure whether Obama’s plan or Hillary Clinton’s would be the one on the table.
After the 2008 Presidential election, Obama’s plan was fully formed and put to Congress, and business leaders had to wonder if it’d be passed. After passage, there were doubts as to whether the Supreme Court would uphold the new law.
Each of these steps has introduced another layer of uncertainty that has impacted business leaders’ thinking about whether healthcare reform would be a factor in their decision-making, and (if so) what the law would actually look like, when it would be enacted, etc. Many have been frozen with indecision about whether to expand, to hire or fire; since no one knows what another employee might cost six months after hiring.
And now, after all the uncertainty is finally subsiding, Congress is generating a new debate on whether to repeal Obamacare entirely.
Nor are business leaders the only ones plagued by indecision because of such rampant uncertainty. Individuals also have greater trouble making decisions. For instance, people can’t necessarily depend on a job to remain available indefinitely, or even if a company will survive a future downtown as the result of changing circumstances.
Traders and investors are similarly paralyzed because they’re left clueless as to what demand will look like in six months. It’s totally unknown what commodity prices will be, let alone will the geopolitical landscape will look like. Will Greece be on the Euro? Will Crimea belong to Ukraine or Russia? Will Cuba be open for business and investment?
Along with uncertainty, leverage and illiquidity comprise the three biggest threats for any developed economy. Today in the US, in addition to pervasive uncertainty, there’s far too much leverage and far too little liquidity. Margin debt is at the highest levels on record while at the same time market liquidity is extremely low because (1) most investors, thinking the market is going to continue higher indefinitely, are fully invested and (2) most major banks have backed out of trading, making it less likely they’ll prop up the market in another downturn.
The end result of these three threats is that, should market sentiment changes quickly, financial markets are going to suffer major moves lower. When increased levels of uncertainty, leverage and illiquidity exist all at the same time, there’s no such thing as small moves down.
