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The Politics of Delayed Disaster

The Obama administration became worried in July that further worsening of the euro crisis would be very damaging to the re-election effort. Therefore they leaned heavily on eurozone leaders to at least hold it off until after the election. Particularly significant is German Chancellor Merkel's change of heart, over the very public and persistent objection from Bundesbank.

To summarize, it's all election politics. And I'll add Chinese politics into the mix: China will undergo its once-in-a-decade power transition in about a month. But the supposedly anointed next leader, XI Jinping, has been ubiquitously missing from several highly visible events in recent weeks, not the least being Secretary of State Hillary Clinton's visit. This coming right on the heels of the dramatic and embarrassing events around his former rival, Bo Xilai, rumors have spread far and wide about continuing power struggle and uncertainty in the transition. But now there are signs of this coming to an end.

How is this related to the economy and financial market? For the past month or two the Chinese government has been in a state of confusion and paralysis, on top of the general caution ahead of a power transition. Now the state machine is refocusing on avoiding economic crisis at any cost, from some concrete steps in implementing the new 1 trillion Yuan stimulus package to a massive organized stock buying -- not on direct government orders, but something like that, which institutional investors were more than happy to comply.

Combining both, the picture emerges: due to coincidence in timing, major governments in the world are highly motivated to delay disaster for at least a few months. In retrospect, U.S. markets have picked up on this and started taking position in mid-August. And it's likely that the reduction in uncertainty in Chinese politics will have visible and lasting (for a few weeks) impact worldwide.

Of course, just because governments try to delay disaster doesn't mean they'll succeed. Take the recently announced, already highly successful (before anyone knows what it will be) outright monetary transactions program from the European Central Bank as an example.
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