2701: Political Situation, 14 Mar, 2009

We have now had a good enough look at the Obama administration's economic policies to make some preliminary observations. My main conclusion is that they are not a dumb as they look. It would appear that Obama's economic team figures that another Depression is not going to happen, and that Fed actions taken to date will keep the dollar economic system from collapse. They have therefore decided to run the standard economic policy for a new president:

1. Cause or allow a recession in the first year. Recessions are good for the economy, sort-of, and by the time that Obama is up for re-election, nobody will remember 2009 anyway. If people insist on talking about the economy, just blame George W.

2. Arrange for a decent recovery in time for the off-year Congressional elections. (4Q, 2010)

3. Arrange for a boom just before the 2012 election.

It also appears that Obama, whatever his personal feelings or political positions, has decided to allow the Liberals to take advantage of the situation. This is dubious policy, and reminds me of the way that George W Bush's people took advantage of 9/11 to pass a bunch of wiretap bills which had been gathering dust for many years. What's the downside? Simply this:

The odds of an economic recovery in the 3rd quarter are now zero, and the odds of a recovery by December are now 50/50. The job situation is going to be very bad for the next 9 months. What the political fallout is going to look like, I can't say. Meanwhile, the Fed is going to have to figure out a whole bunch of important issues, and they are not likely to get much help from Treasury.

That leaves the Fed. The bad news is that they are going to have to perform a massive over-reach of their authority in order to straighten out the situation. The good news is that nobody who objects to this will be able to get their act together, for the same reasons they were unable to get their act together in general. The two big issues which I do not hear people talking about are the fact that the current US trade deficit is still unsustainably high, and the fact that the European banks are in even worse shape than the US banks. The central problem with the US trade deficit is that it continues to increase the US debt:equity ratio in both the corporate sector and the consumer sector.

Unfortunately, a lot of (foreign) people have become very comfortable with this situation and do not want to see it change. The European banks' problem is simply that the stupid and corrupt banking regulations which the US had during the last 16 years were not as stupid and corrupt as the Basil Accords. Details available on request. The bottom line here is that the Fed is going to have to manage the money supply, even as the velocity of money does the roller-coaster thing. The current Fed chairman got off to a bad start, but I think that he's the kind of guy who learns fast. Let's hope so.

-dave chapman

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"Help me Obi wan Bernanke. You're my only hope!"