Dear Friends,
It seems to me that as soon as the real economy kicks in the US will have several problems crop up that will imperil the economic reawakening.
One is the very low interest the government is paying on bonds. Once the economy starts to gain traction the rate of inflation will rapidly rise due to the high level of quantitative easing already in the market. Pulling trillions of dollars back from the economy will be e Herculean task. Doing so without causing the economy to roll over or to inflate will require the wisdom of Solon as well. Inflation being the most likely outcome.
When this tidal wave of inflation hits and banks are caught flat footed with their money tied up in very low yielding treasuries they will panic trying to get out. This will necessitate a loss. The banks will turn to the government to cover the losses and the government will issue new debt to cover the banks losses. As they have come to expect. Non the less the banking industry will take a good knock. Similar to the one that put us in this downturn.
The government will have to sell new treasuries at a much higher rate. Rapidly driving up mandatory government spending. On a six month rotational basis the US government will have to roll trillions of dollars of debt from one half percent interest to perhaps four or more percent. This will dramatically lower the availability of money in the capital markets for plant and equipment upgrades, wage increases, new opportunity investments, etc…
Remember, when economists say that the US consumes too much, part of the equation is government consumption of debt. As government consumes debt the capital must come from somewhere. If the American people are not saving sufficiently to cover the debt it must be imported from abroad. This is factored into the US balance of trade. The elephant in the room is that it presupposes investors in other countries have an appetite for US government debt. If the money is inflating rapidly, debt in US dollars, are much less profitable. If the US government is seen by investors as too debt laden compared to the rate of growth in GDP then US government debt will become even more expensive.
Another shoal in the waters of any economic advance is US energy policy. Which is easy to sum up. It is to drive the cost of energy as high as government policies can. Even at the low rate of demand we see in the US energy price is relatively high. Moratoriums on drilling and permanently closing production facilities have that effect. If government, in their total lack of wisdom, enact Cap and Trade under any name the cost of energy to the US consumer of energy will skyrocket. Imagine how much less spending power a consumer will have when his or her electric bill goes from $90 a month to $500 a month… No way that could hurt the economy.
The one ace we have in the hole is that the government is at present doing it’s best to keep the economy in the doldrums. It’s every action, from threatening the biggest tax increase in US history to constantly increasing levels of regulation, serve to keep the economy off balance. Moratoriums on drilling that cost thousands of good paying jobs ensure the unemployment rate will stay high and increasing regulation will make companies that are too big to fail even bigger. Only the biggest companies can meet extremely intrusive government regulatory rules.
The present faction in power have established equilibrium. An equilibrium of stagnation and lower expectations… But an equilibrium. The faction that will come into power in the Congress will have a tough job ahead. Navigating the shoals I have pointed out and many others the deluge of government intervention in the markets have laid down will be a challenge. With the faction that is now in power attacking with it’s fifth column in the unbiased media propagandizing every move.
The challenge is daunting but the rewards are many. I hope and pray the faction that is in power when the dust settles after the election is up to it…
