A Sad Day for the U.S.

* A famous philosopher or statesman once wrote that: 


“democracy will cease to exist when the people vote themselves money”, 


or something like that. And this is exactly what the people, and by extension, the government has just now done. If I told you 4 years ago, that the Federal Reserve would print over $2 trillion of new money, and that the US government would run 7-10% deficits for an extended period of time, totaling $1 trillion a year, I would have told you that there was no way this could happen, and that we would be destroying our financial system. Every step along the way, we are lurching toward a fate with destiny, which will be more ridiculous than last night’s NY Jet’s loss.


When Obama took over as president, he had a unique opportunity to shape the future of our country, and make an imprint on the fabric of our society and economy. Obama was besieged by the circumstances of the financial melt-down which was on-going when he took office. Instead of using the emergency environment to embark on bold new programs which would create a new future for the American economy, he kept a good part of Bush’s economic team around, and embraced a plan to deficit spend our way out of the current hole by using traditional methods. The most prevalent program of his $878 billion stimulus package/recovery act of 2009, went to education. In short, states, faced with declining revenues due to the financial melt-down, had to either cut educational expenditures, or become insolvent, since states did not have the ability to deficit spend.


Spending money to keep teachers employed was the most expeditious way in which Obama could preserve jobs. I am not against the concept of investing in education for the benefit for future generations, but the spending needs to be done to create structural changes in the way in which educational services are delivered, and to encourage US children to go into fields which will dominate the high tech economy of the 2000′s, like engineering. Many of the emerging Asian countries have been dominating these professions, especially when measured in proportion to the size of their economies. My thesis today is not about education, of which I am no expert, but rather to point out that the main thrust of Obama’s stimulus plan was to keep teacher’s employed without altering the landscape of our educational system. It was expedient to keep teachers employed, yet not practical if one takes a longer view. Obama’s spending plans were as simple as Bush’s stimulus check program, in May of 2008. No change in my opinion!


These are quick fixes. This is not how a great country expands its global reach and encourages greatness within its borders. We should have been formulating plans to spend money on infrastructure, and to encourage educational studies which will make us great. And so it is with yesterday’s announcement that Obama and the Republicans have reached a compromise to extend the Bush tax cuts for another 2 years, extend jobless benefits for those who have reached the 1 year limit on this, as well as payroll and estate tax breaks. This will expand the budget deficit by $450 billion in 2011. On top of existing CBO projections for a 2011 deficit of $1.06 trillion, this will put the deficit over $1.5 trillion.


For the time being, the markets are happy about these prospects. This is at a time when Obama led the American people to believe that we would be working on cutting the budget deficit, not going for a record deficit. In addition to all this, we are squandering our chance to spend these monies on programs to improve the nation’s infrastructure and improve our educational system.


Adding this together with the Fed’s QE2 plans, the Fed is effectively monetizing this portion of the country’s debt. Is this plan going to improve the economy? On the surface, it will. However, much of our GDP boost will also translate into increased imports from the trade surplus countries. 


Ok – so I do not think this is a good thing. But, what does it mean for the markets? For starters this should encourage investors and traders into the risk-on trade, as this morning’s strong markets suggests. If I go with the general thesis of the markets leading up to the QE2 announcement, then the markets might have a bit further to run, or do current market levels represent the best of all possible worlds? For my two cents, I have a hard time buying into the very heady environment at current levels.


Admittedly, I am in a bit of a quandary. I am deeply concerned about the deflationary environment we are in, yet I know better than to fight the tape of the markets, which government deficits and Fed money printing engender. 


I usually like to end my blogs with a nice and neat ribbon around the through du jour, but honestly, I am having a hard time reconciling how the opposite forces at work will play out over the next year or so. If I super impose my 4 year cycle, which should be bullish at least through 2011, with bullish seasonals through April, I have to believe the the next 5 months should be ok for risk assets, yet there are over-bought technical factors at work which suggest that markets will not go up in a straight line.


Ultimately, I know the actions of our politicians will destroy our financial system, and the value of the US dollar. In turn, this favors commodities and precious metals. Despite the favorable market reaction this morning, I consider this a sad day for the US.