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     Feb 12, 2009
Muscled-up Pelosi casts shadow on world
By John Browne

In a sign that may reveal much about the current dealmaking environment in Washington, House speaker Nancy Pelosi has outmaneuvered the administration of President Barack Obama in the design of the US$827 billion so-called Economic Stimulus Package.

With the collusion of three moderate Republican senators - Susan Collins, Olympia Snowe and Arlen Specter - Pelosi may succeed in steering Obama into supporting a package with which he may secretly disagree. The three backed Democrats on a Senate vote on whether to shut down a Republican filibuster and again to pass the bill.

Despite the presidential rhetoric of change, the Pelosi plan is


Washington at its most habitual. Her version is a massive, pork-laden monster. Tilted heavily towards consumption, only 10% of the bill is allocated toward the infrastructure spending that the president talked about so frequently during the campaign. Obama initially favored a middle way. It was to be based on massive public spending, but specifically on infrastructure.

Far from restoring the economy to health, the pork-barrel Pelosi plan will likely force the US economy into the catastrophe of acute stagflation and decline, with grave long-term repercussions at home and abroad.

It is clear that we are now headed into an abnormally severe recession, and we may be face-to-face with a second great depression. Tell-tale symptoms of depression include competitive currency devaluations and protective trade measures. Of even greater concern is the historic fact that trade wars too often lead to hot wars. The times of peace and unprecedented prosperity that we have enjoyed for decades are now under threat.

With the stakes this high, Pelosi should have restrained her urge to flex political muscle.

Most economists agree that America has enjoyed unprecedented prosperity, based primarily on excessive US dollar liquidity and unmanageable levels of debt. Thus, any healthy correction would necessarily involve serious deleveraging and a severe recession. After a lot of pain, the economy would rebuild with healthier fundamentals. Infrastructure improvement would aid, but not cause, the eventual recovery.

Recession is the natural cure for the politically inspired profligacy that America has enjoyed for almost 40 years. Unfortunately, the side effects of this medicine, namely the rapid reallocation of labor resources and deflationary damage to debtors, are still unpalatable to pandering politicians.

The Washington regime, particularly members of the Democrat persuasion, leans towards a socialist solution of avoiding recession at any cost. After all, the bills are paid by others, such as taxpayers and holders of US dollars. This results in an increasing amount of other people's money being spent on "public" works that would in other times carry the label "pork barrel".

Washington is choosing to pursue the policy of continued and ever-increasing false prosperity, financed eventually by hyper-taxation, hyper-debt and hyper-inflation accompanied by a gradually eroded standard of living. The jobs created by the bill are by and large non-productive and will divert resources from the private sector and rob consumers of their power to make free choices in the marketplace.

America's infrastructure is in great need of restoration. By some estimates, for every $1 billion spent on infrastructure, some 35,000 real, wealth-creating jobs are born in the private sphere. For "just" $100 billion, 3.5 million jobs would result. Furthermore, this middle way of Obama's likely would have commanded much greater bipartisan support than the lonely Republican trio who attached their names to Pelosi's bill.

Unfortunately for American and international investors, Pelosi pressured the president into the worst of all plans. It will likely bring on an economic catastrophe, characterized by depression followed by hyper-stagflation and civil unrest. Pelosi's power play may buy her political status, but the entire world will pay the price.

John Browne is senior market strategist, Euro Pacific Capital.

(Euro Pacific Capital commentary and market news is available at http://www.europac.net. It has a free online investment newsletter.)

(Copyright 2009 Euro Pacific Capital.)

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(24 hours to 11:59pm ET, Feb 10, 2009)



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