Almost identical letters by two separate investor groups in the US have urged President Obama to act now to avoid the US debt downgrade. Institutional investors should get involved in this crisis, but the lack of collaboration highlights how far the institutional investor community has to go if it is going to be an effective lobby movement.Two letters came across my desk this week, and with the exception of about three of the 500-or-so words, they were identical.
Both called on President Obama and members of congress to act immediately to address the nation’s deficit and avoid a downgrade of the US by credit agencies. Both claimed to be working on behalf of millions of Americans. And both said: “The decline in the value of the dollar will eat into retirement savings. Businesses will find it too expensive to create jobs. Ultimately and most painfully, economic growth for our nation will stall for years to come and diminish the quality of living across America”. Word for word.
One of the letters had the names of the chief executives of its signatories – which were a group of 10 state public pension plans representing about $1 trillion. This letter also indicated the fallout would have a devastating effect on portfolios.
The other, identical, letter was signed by a seemingly odd collection of mostly funds managers but also a couple of state treasury departments, which manage the pension assets.
Both letters urged the politicians to “act with unity of purpose and spirit of commitment”. With this mishmash of PR and politics in my face, I pondered about my right as a journalist to be cynical. In my trade, plagiarism is one of the worst crimes, and more broadly speaking I would attest no one likes a phoney. But if it’s possible, imitation is arguably more destructive when it could cannibalise a bid to incite action over one of the more serious economic situations in modern history.
There is now less than a week before the August 2 deadline to raise the debt ceiling, and politicians can still not agree on how to do this. The US hasn’t defaulted on its obligations to pay its debt before, but it does have a history of raising the debt before that limit is reached. And on several occasions Treasury took extraordinary actions to avoid reaching the limit. This is politics at its most political.
According to a paper by the Congressional Research Service: “The consideration of debt-limit legislation is often viewed as an opportunity to re-examine fiscal and budgetary policy. Consequently House and Senate action on legislation adjusting the debt limit often is complicated, hindered by policy disagreements and subject to delay.”
Certainly the infighting this time seems short-sighted, narrow-minded and parochial.
Meanwhile influential funds managers, such as PIMCO, have said the US could suffer a downgrade regardless of the congressional result.
In an article in The Huffington Post, chief investment officer of PIMCO, Mohamad El Erian, said: “Anyone who travels will tell you that America’s friends and allies are bewildered at what is going on here (and its enemies rejoicing). This comes at a time when the country can ill-afford to lose the confidence of large foreign holders of US Treasury bonds, overseas manufacturers with factories here, those that use the dollar as the reserve currency, and the many who have outsourced to here the intermediation of their hard-earned savings and pensions…. It is highly likely that the solution will be a Band-Aid that has to be replaced in the coming months. In the meantime, America’s structural injuries will deepen and, to an extent that was unthinkable, America’s economic future will become even cloudier. This country’s turnaround is less of an economic engineering predicament and more of a political fix. But if Washington continues to squabble and if acrimony intensifies further, it will quickly become both.”
With the volume of assets and number of individuals in their custody, institutional investors should, and can, play a role in influencing economic policy. But the capacity to be heard is diluted unless there is a united voice.