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I Know What Keeps Obama Awake at Night
While Obama relaxes in Hawaii, sipping Mai Tai’s adorned with little umbrellas and hooking up with distant relatives, a potential nightmare is giving him sleepless nights. Let’s say we spend our $2 trillion in stimulus and get a couple of quarters of decent growth. The “V” is in. Then once the effects of record government spending wear off, we slip back into a deep recession, setting up a classic “W.” Unemployment never does stop climbing, reaching 15% by year end, and 25% when you throw in discouraged job seekers, jobless college graduates, and those with expired unemployment benefits. This afflicted Franklin D. Roosevelt in the thirties.
So Congress passes another $2 trillion reflationary budget. Everybody gets wonderful new mass transit upgrades, alternative energy infrastructure, smart grids, and bridges to nowhere. But with $4 trillion in extra spending packed into two years, inflation really takes off. The bond market collapses, as China and Japan boycott the Treasury auctions. The dollar tanks big time, gold breaks $2,300, and silver explodes to $50. Ben Bernanke has no choice but to engineer an interest rate spike to dampen inflationary fires and rescue the dollar, taking the Fed funds rate up to a Volkeresque 18%. %. The stock market crashes, taking the S&P well below the 666 low we saw in March. Housing, having never recovered, drops by half again, wiping out more bank equity, and forcing the Treasury to launch TARP II.
The bad news accelerates into the 2012 election year. Obama is burned in effigy; Sarah Palin is elected president, and immediately sets to undoing all of his work. Republicans, reinvigorated by new leadership, and energized by a failing economy, retake both houses of congress. National health care is shut down as a wasteful socialist mistake, boondoggle subsidies for alternative energy are eliminated, and the savings are used to justify huge tax cuts for high income earners. We invade Iran, and crude hits $500.
If you’re over 50, and all of this sounds vaguely familiar, it’s because we’ve been through it all before. Remember Jimmy Carter? Remember the “misery index,” the unemployment rate plus the inflation rate, which hit 20, and catapulted Ronald Reagan into an eight year presidency? A replay is not exactly a low probability scenario. This is why junk bond yields are still stubbornly high at 12.5%, and credit default swaps live at lofty levels. It’s also why the investing public is gun shy, favoring bonds over stocks by a ten to one margin. Are the equity markets pricing in these possibilities? Not a chance.
The risk of economic Armageddon is still out there. Personally, I give it a 50:50 chance. Batten the hatches, and please pass the Xanax.
For more iconoclastic and out of consensus analysis, visit me at www.madhedgefundtrader.com.
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Agree. Dems are sealing their fate as I type this.
Cash flows continue to disappear and energy costs are moving higher.
+1
It's funny you should mention "Obama burned in effigy". This article from the BBC this morning:
http://news.bbc.co.uk/2/hi/americas/8438852.stm
It didn't even take until 2012.
Personally, I don't think that Bernanke ever intends to come to rescue the dollar. If inflation kicked up as you suggest, the Fed would probably keep printing to sustain expansion. This of course would lead to the collapse of the dollar, but it could be replaced with some sort of international currency. Not a real solution, but it seems we're headed in that direction.
This is clearly a hoax.
They are reporting this in the states - http://news.yahoo.com/s/afp/20100104/ts_alt_afp/uspoliticsobamathreat
This also happened before, several times in fact. Still, pretty disturbing, if not highly ignorant. A better effigy to hang would be Blankfein or Bernanke.
You are right. I think the Fed will try to maintain inflation higher than a comfortable target of 2.5%, but not so high as to be politically unacceptable. They would like an extended period of 5-6% inflation without much action (but lots of talk) to bring it down.
But we also need to be aware that any significant inflation would be a disaster to retired ( or about to retire) baby boomers. That may have a big influence on the politicaly acceptable rate of inflation. But then again, could the boomers vote be bought with handouts and welfare to offset their inflation loss? A decade of 6% inflation would go a long way toward solving many debt problems.
"But we also need to be aware that any significant inflation would be a disaster to retired ( or about to retire) baby boomers"
As if artificially low interest rates combined with higher food, energy, and healthcare are not currently a disaster for many that are now retired?
There exists the possibility of a decade of 6% inflation with little or no increase in wages. That scenario certainly promotes beltway insomnia.