Debt and Elections

As I have pointed out in previous posts, I believe that the United States is moving toward what used to be called stagflation - persistent high unemployment and persistent high inflation. We already have the persistent high unemployment and food and energy prices are beginning to get out of hand. Rising energy prices, in particular, will adversely impact the economy and this will tend to inhibit job creation. The Federal Reserve's second round of Quantitative Easing (QE2) is scheduled to end in June. It was designed to help the economy by pumping money into it and indeed the stock market has benefited. As is usually the case, when money is plentiful, prices tend to rise - inflation.

Federal Reserve Chairman Bernanke is charged with keeping the economy on an even keel. If, and when, he believes that inflation is a real problem he will move to restrict the money supply. For this reason, I do not foresee a third round of Quantitative Easing. I believe that interest rates will increase as a result of this and other Federal Reserve policies. A rise in interest rates is the standard cure for inflation. Higher interest rates will be a significant problem for the entire economy. (It is perhaps easiest seen in the adverse impact that it will have on the housing market.) At the end of the last round of Quantitative Easing, both the stock and bond markets reacted negatively. I expect that, although the economy is on slightly stronger ground now, both will once again react negatively.

This is all happening at the same time that we are attempting to face up to our debt problem and are entering the 2012 election cycle. It will be interesting to see how the public reacts to the emerging economic realities of 2011. I presume that liberals will want to continue the policies that got us into this mess, while conservatives will continue to press for a change in course. In the process, unfortunately, most of the thunder and lightening of the debate will be devoted to whose fault it is. Anyone who has read any of my postings will understand that I dislike Mr. Obama's economic policies, but please know that the fundamental problems that we face are not just his fault. Previous administrations and congresses, Republican and Democrat, share in the blame. I focus my ire on Mr. Obama only because he is in the chair right now and he is the one that must start fixing the problem.

As we consider our political future we must remember that the reason we are in this mess is because we have over spent and are over spending. That not only can not continue - it will not continue. That is a fact of economic life. The only question is how the overspending comes to an end. Whether we do it sensibly or have it forced upon us, a la Greece. I advocate getting our spending under control right now so that we will have the kind of future that we all want. Politicians talk about protecting our children's future. I agree with that objective, but I assure you that we are also talking about our own immediate future. In fact, overspending is already adversely impacting our lives. It is stupid, and we are doing it to ourselves.