Obama Administration Drops a Deficit Grenade (2)

By Drew, our contributing writer from the world of banking and corporate financeflag-eagle-debt

I’m in the camp that says in the short run inflation is not an issue.  Why?  Because the monetary stimulus has been sucked up into bank reserves, velocity has slowed, and demand for loans is light.  Further, there is so much slack in the economy (productive capacity and labor) that the aggregate supply curve is essentially flat.  But the question is: how long will this be the case?  A year?  Two years?

Eventually the reality of financing this monstrosity of a spending binge will come to roost.  If it is financed with higher taxes you can kiss GDP growth of the historical level goodbye.  Slow growth and high unemployment – Europe shows us this.

If we borrow, eventually interest rates will have to rise precipitously to attract those Chinese investors, choking off growth.

And so the last option is the printing press: inflation.  And that’s exactly what the politicians have in mind in my view.  Watch very, very carefully who Obama appoints as his Fed Chairman.  If he’s an inflationist (Alan Blinder) Katy bar the door, and buy your tips bonds.

I think you will also find that the mother of all bait and switches is coming as well: means testing.  It will surely hit Medicare.  But also, I think, Social Security.  Thanks for paying in all those years, but you don’t need it.  Sorry for breaking the promise, its for the good of the country.  Crisis, you know.

The only good thing about this is that it would lay threadbare Social Security as the welfare program it has become.  Not an insurance program.  And that’s one thing that might get voters mad.  Maybe……

It is frightening how fast the spending binge has occurred.  I’m no defender of GWB and his spending binge, but lefty partisans have conveniently lost sight of the fact that the House went Democratic in 2006.  They’ve been in charge of the pocketbook for 3 years now.  And now with total control, you can see – after campaigning against spending – that they have simply turned up the spigot.  When their rosy assumptions prove untrue it will truly be a fiscal mess.

Here are some random predictions:

1.  The era of big sports money will come to an end.  Slow growth will mean that corporations and individuals can’ bear the freight on tickets/boxes.  The value of franchises is already on the decline.  Salaries will follow.

2.  Unemployment will breach the 10% mark, and remain high for as far as the eye can see.

3.  We won’t see sustained 3% annual GDP growth.  For a decade.  We might see a blip here with what looks like it might be a double dip recesion.  But that’s it.

4.  The global warming nuts will lose out to economics  (the silver lining in this huge, dark cloud.) Its nice to overpay for energy or energy saving devices when you are flush with the value of your house or the equity markets.  Now, not so much.  Looked at how any solar ventures started the last few years are doing?  They are bankrupt.

5.  Golf country clubs will return to being the province of the rich.  Many clubs will go semi-public.

6.  It will take at least 5 years to refill all the empty retail space you see around you.

7.  Without a rapid change is attitude, the exodus from the decrepit high tax, business unfriendly states – Michigan, Illinois, California, Pennsylvania, New Jersey etc – will accelerate.  The winners in a big, big way will be Texas, Tennessee, N and S Carolina, Utah and the like.

Here’s a shorter version of everything I just said:  there’s no free lunch.  This system, where half the nation votes in politicians who promise to let them mooch off the productive efforts of a minority simply can’t go on forever.  The bills are coming due, and the current President and Congress are going in precisely the wrong direction.  Those who think they are in for that free lunch are going to find their standards of living dropping like a stone.

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