The United States economy is in uncertain times. Analysts are split between
those seeing recovery and those fearing a second downturn. This confusion is
being echoed in the highest levels of government as President Barack Obama
simultaneously speaks about the need for more federal spending and warns of the
dangers of increased debt. As the volatile markets indicate, investors are not
only confused - they are seriously concerned.
The country appears to be going through a period of buyer's remorse over the
election of Obama. The majority cobbled together by the president one year ago
included the Democratic base, independents hoping for "change", and many
disaffected Republicans betrayed by the George W Bush administration's
big-government neo-conservatism. It is unlikely that most of these voters
favored an overt push toward socialism; however, this is
what they have received. As the "tea parties" - town-hall like meetings held to
debate healthcare and other issues - illustrate, voters are not only confused;
they are seriously concerned.
These concerns are justified. The administration's hard-left turn was evident
from the outset. Ignoring expert advice to spend on job-creating
infrastructure, Obama spent wildly on entitlements. Now, with rising grassroots
discontent, a falling currency, and threats to America's AAA credit rating,
there is some evidence that the administration is trying to hedge its bets
through tough talk. Yet, it still has not taken any tough action.
As their gold stockpiling highlights, foreign governments are also not only
confused - they are seriously concerned. Over at the Federal Reserve, no such
soul-searching appears to be underway. Its chairman, Ben Bernanke, is clearly
intent on avoiding deleveraging. He has charted a course of massive liquidity
injections, financed by hitherto unimaginable levels of monetary inflation. He
has even attempted to coordinate these expansionary policies on an
international basis.
For the moment, the cheap liquidity has saved Wall Street. To the delight of
the Goldman Sachs, et al, the Fed has created a boom in financial assets,
including equities, bonds and commodities. These rallies have stimulated a
nearly universal belief that the worst has past. This feel-good attitude could
be clearly seen on a recent cover of The Economist that read: "After the Storm
- How to Make the Best of the Recovery."
But, to many people, life looks increasingly desperate. Official US figures
admit to some 15 million unemployed. Despite the massive stimulus packages,
American consumers are still in shock and not spending as they once did.
Already, the fall in consumer demand is larger than that of the early 1930s.
The authorities now face a moment of truth: admit that they don't have the
power to bring the consumer back to life or redouble their efforts,
consequences be damned.
The whole world awaits the decision, which could indicate a wild inflation, a
major recession or the worst of both.
Should the administration accept, or even be forced to accept, an ultimately
healthy deleveraging, a deep recession would ensue. Entitlements would have to
be dramatically reduced while taxes remain unreasonably high. Otherwise, the
federal government could face outright default. Barring a popular revolt, this
course would lead to a sustainable recovery.
On the other hand, if the government continues to run the printing presses, as
seems far more likely, hyperinflation will become a distinct possibility. While
this may create the appearance of recovery, with rising stocks and less
short-term unemployment, average citizens will notice a sharp decline in their
standard of living. It will get harder and harder to make ends meet as wages
increase less than the cost of everyday goods.
The hyperinflation scenario will likely buy the administration a little more
time, but would eventually give way to the worst of all possible worlds:
hyperinflationary depression. Here, America would feel a deep recession
concurrent with rising prices - similar to what we're seeing right now with
gold. This is truly a devastating outcome and should be avoided at all costs.
America is at a crossroads. It is important in these times to have leaders we
can trust to make the right decisions, even if they are unpopular. Obama,
Bernanke, Senate majority leader Harry Reid, Senate banking committee chairman
Chris Dodd, House Speaker Nancy Pelosi, House financial services committee
chairman Barney Frank ... These are not names that are trusted to make wise
choices over expedient ones. The markets know it; the voters know it; and,
judging by the price of gold, the rest of the world knows it too.
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 on-line investment newsletter.
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