"There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved."
- Ludwig von Mises

Tuesday, October 5, 2010

Expect Austerity and Gridlock in 2011, Republicans likely to take House

This November, the US will hold elections for the US Congress, which includes the Senate and the House of Representatives.  Gallup just came up with a new poll that shows the Republican, under two "participation rate" scenarios, handily beating the Democrats.  And this may not just be any type of victory, but a truly historic one. 

From the Washington Examiner:

However, Gallup also shows the results for two different turnout models. Under its “high turnout model” Republicans lead 53%-40%. Under its “low turnout model” Republicans lead 56%-38%.

These two numbers, if translated into popular votes in the 435 congressional districts, suggest huge gains for Republicans and a Republican House majority the likes of which we have not seen since the election cycles of 1946 or even 1928. For months, people have been asking me if this year looks like ’94. My response is that the poll numbers suggest it looks like 1994, when Republicans gained 52 seats in a House of 435 seats. Or perhaps somewhat better for Republicans and worse for Democrats. The Gallup high turnout and low turnout numbers suggest it looks like 1894, when Republicans gained more than 100 seats in a House of approximately 350 seats.
Article HERE.
So what does this mean for the current global financial crisis?  It means that the creation of future Keynesian stimulus measures could be at severe risk.  The Republicans are running as the party of small government once again.  Historically, they only really mean that when the President is a Democrat.  Remember Bill Clinton and the government shut down threats?  Or the Republican Congress when George Bush was President?  Funny how ideology always takes a back seat to winning an election.
I'm no fan of Keynesianism - at least not the realpolitik version of it that only focuses on increased spending during bad times and avoids increasing taxation during good times.  But one has to admit that the massive stimulus spending, roughly 10% of GDP for 2009 and 2010, is what kept the economy afloat.  Remember the balance sheet example I have mentioned in the past.  A liability on the government's books, is an asset on the private sectors books.  Thus, when the private sector is experiencing wealth destruction, the government steps in to replenish that lost wealth with deficit spending.
The Republicans fear the deficits, and want to stop this.  And I can understand why.  But I also know that cutting spending in a depression makes the depression worse.
So...  what does this mean long term?  If neo Keynesianism is likely to be curtailed, that is, the Federal Government may not run deficits as it did in prior years, does the government have another option?
Yes it does!
Enter Mr. Ben Bernanke.  He will print, and then print some more.  Quantitative Easing is basically a guaranteed course of action.  But overall, government really only has two choices here:
1) Kill the economy by cutting deficit spending - i.e. remove or curtail stimulus programs, and thus the private sector is on its own to expand.  Good luck with that during a severe balance sheet recession not seen since the Great Depression.
2) Kill the currency by quantitative easing - on a grand scale.  Buy every piece of junk paper debt you can, explode the Federal Reserves balance sheet - and reveal to the world what a farce fiat money is.
So what's the best option?  That's a trick question because there isn't one.  It makes no difference how the current monetary system comes down, when mathematically, it is inevitable that it will collapse.  There are two major forces affecting the current paper dollar based global monetary system.  Triffins Dilemma, and the inevitable pyramid dynamic of ever increasing debt ultimately overshadowing an economy's ability to handle it.

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