Posted on 11/05/2010 3:15:56 PM PDT by WebFocus
Now that the elections are over, attention is turning to the economy.
The stock market rose steadily from the end of August up to the elections. Since the stock market tends to be forward-looking, its recent strong and steady rise suggests that investors have been optimistic. In my opinion, two factors have generated that optimism:
1) The expectation that significant Republican gains in Congress would produce political gridlock, thereby putting the brakes on the Obama/Pelosi/Reid/progressive spending binge.
2) The Federal Reserve's promise of "QE2," a second round of "quantitative easing," the currently fashionable euphemism for creating mind-boggling sums of new money out of thin air.
Sorry to rain on anyone's parade, but I don't believe that gridlock (assuming it happens) and QE2 will be sufficient to turn the economy around. There are several reasons for my tepid outlook.
Surely, gridlock-a political stalemate between the Democratic president and congressional Republicans-will change the game. There will be no more enormously expensive and economically crippling legislation, like the mega-non-stimulus and healthcare/insurance reforms that were passed, or the cap-and-trade monstrosity that was barely averted.
To use a medical metaphor, compare the economy to a human body that has been bludgeoned. Obviously, it helps when the bludgeoning stops. But just because additional blows aren't being struck, it doesn't mean the patient is healthy; the patient is still at risk from internal injuries. Our economy urgently needs a trip to the emergency room for radical surgery and intensive care. The government needs to undo the massive damage it has inflicted on the economy over the last several years. It needs to reverse, not merely halt, runaway spending, and to shrink, not just slow, the growth of the federal bureaucracy.
Recently, the Congressional Budget Office released a study projecting total federal spending of $44.5 trillion during this decade. Since we are already choking on $3.7 trillion of spending this year, the implication is that Uncle Sam is on track to spend over $5 trillion in other years later this decade. Will the new Congress, even with the addition of several dozen fiscal conservatives, be able to overcome Obama's resistance to canceling trillions of dollars of planned spending? I doubt it.
Those longing for a return to the economic good times of the 1990s by replicating the gridlock that existed between the Clinton White House and Gingrich Congress need to realize that circumstances are significantly different today. Gridlock tends to preserve the status quo. That was desirable in the mid-90s, when the economy was healthy and growing; preserving today's economic stagnation, by contrast, is not desirable; it is unacceptable.
Even if Obama and the new Congress surprise us by reducing the annual rate of growth of federal spending to the modest 2.9 percent level that Clinton and Gingrich achieved (highly unlikely, given Obama's ideology), the ticking time bomb of Social Security, Medicare, and Medicaid's unfunded liabilities will continue to push us inexorably onward toward ruin.
At any time, the world's bond investors may demand a higher interest rate to compensate for the risk of insolvency. That would cause the cost of financing our trillions of dollars of debt to soar, consuming hundreds of billions of dollars of tax revenues.
The see-no-evil optimists would say, "Hey, why worry? The Fed will buy all those bonds." That's the purpose of QE2.
The problem here is that bond investors will still demand a higher interest rate to compensate them for the cheapening of the dollar (what we call an "inflation premium") that will inevitably result from the Fed creating so many new dollars to buy the Treasury's debt. In anticipation of QE2, major bond-buyers-notably the Chinese and PIMCO, the largest American bond fund-have already started to sell Uncle Sam's bonds. I wouldn't want to bet against PIMCO chief Bill Gross, who is to bonds what Warren Buffett is to stocks. If the exit from bonds becomes a stampede, Katy, bar the door, because QE2 may then go to infinity, as in "hyperinflation." Adios, greenback!
Ben Bernanke has to know that QE2 cannot possibly produce prosperity. QE2 is another instance of "the money illusion" that all Econ 101 students (at Grove City College, at least) learn: Money isn't wealth, and even if the central bank created a million dollars for every single American, we wouldn't be any richer in real terms.
Yes, it's possible that a flood of new dollars may buoy stock prices, but in terms of real wealth and real jobs for Americans in general, lots of luck. Those pinning their hopes for a vigorous economic turnaround on political gridlock and QE2 are likely to be sorely disappointed.
- Dr. Mark W. Hendrickson is an adjunct faculty member, economist, and contributing scholar with [2]The Center for Vision & Values at Grove City College.
De-funding the IRS could change the whole game.
The article fails to examine some potentialities at the heart of the Tea Party movement. Ideally the rallies will get going again soon, sending dismay to those desperately hoping they will vanish like Ross Perot.
It would be sweet to see Tokyo Rove whining helplessly to an audience that is laughing at him.
Clearly the stock rally is a product of anticipated inflation. The silver lining is that if the Republicans actually stand their ground, the Senate Democrats will defect and leave Obama with a dilemma. Go along or get devoured by his own hate of American Execptionalism. Huge political calculation for a Community Organizer, token intellectual. The only question is will the Trent Lott, Lindsay Gram RINO’s find a way to undermine the Senate?
During the last great Depression America had something others wanted we had manufacturing/goods that the world wanted and that produced jobs well most of that is gone all we have left is the Dollar and mainly a service economy for jobs. I noticed an article today touting the fact that retailer’s were hiring for Christmas those jobs are temporary and not high paying.
Well no one wants the Dollar anymore and people with those kinds of jobs are not likely to boost demand for products here let alone be enough to offset the inflation we are starting to see as a result of the Feds printing. Seniors are being paid next to nothing on savings as it is and with the thought of a lessor return will be rethinking their spending.
The Federal Reserve is monetizing the debt. This is going to make U.S. government debt even less attractive to foreign investors.
In order for the current world financial system to maintain stability, there must be faith in the U.S. dollar and in U.S. Treasuries. Once faith in those two pillars is gone, it is inevitable that the whole system will come crashing down
The stock market went up about 8%, dollar fell 8% and inflation was probably 1% for Sept. Net loss of 1%. People in CDs lost about 9% for the month.
You will have no confidence, no capital inflows into the US until he is gone. 2013 by being voted out or sooner if impeached.
People with money that have an IQ above 50 will NOT invest money in the USA until he is gone. Half of the country is on govt support and the people in America who watch TV are idiots who enjoy being brainwashed. They love their ball games and other idiocy.
The US is just like Islamic England destroyed by an serville idiot populace watching football games and reading tabloids.
Thank good for Europe that most countries north of northern Italy and still semi serious countries. Not total idiots like fools watching Desparate Housewives, Mad Men, NFL, NBA or NCAA games in between the “stupid white man” commercials.
sfl
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