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
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
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.)