Friday, August 07, 2009

 

The Obama Summer--Bumped

The Keynsian approach to economics changed the way that economists look at the world. Keynes had a mathematical approach which suited the Progressive era. A time in which it was thought that the natural world was more clockwork than chaotic, that there really was a way to fine tune the economy with fiscal policy aimed at stimulating demand at the right time. Though it was known that the effects of such stimulus would not always be so effective over time hence Keynes' famous quote, "...in the long run, we're all dead."

Keynes was concerned about the short term and the policy of stimulating aggregate demand through government spending programs does work in the short run. I think what we are seeing in the rising stock market and slightly less than disastrous housing numbers is the market getting ahead of the news- the news being that there is a lot of fiscal, and monetary stimulus, coming over the next year and a half. I think what we are going to experience is a mitigation of the deflation over the next year. At least a short spell in which utter gloom is replaced by the green shoots of liberal/media driven optimism.

The Obama administration must realize that fear of huge spending programs and stagnant growth will hamper their agenda so they have an incentive to highlight any good economic news. They will get some because the flood of money will spur some consumer spending and bottom fishing for distressed assets. The only problem for their rosy scenario will be unemployment which will continue to tick higher. (Watch for reports like this: "Hey, unemployment only went up 0.1% last month. The recession is over!")

Obama is already spreading the meme that we averted disaster by passing the stimulus. I think we only have drawn out to the inevitable conclusion. But that won't matter. He only needs to convince enough nervous Blue Dogs that they can stick with his program for a short while longer. He only needs 6 more months to remake the American economy. After that we will need 60+ seats in the Senate plus control of the White House and House of Representatives to undo the Obama agenda and history shows us that those conditions are so rare as to be almost impossible. On a more positive note, we only need to hold him until next spring and then he will be done. The tide has turned and the people have awakened to Obama's far leftist proclivities. The possibility of a short term economic resurgence, an Obama summer, is the one thing I fear.

Update:

The unemployment rate fell a tenth of a percentage point. The Obama summer is officially here. (Now if we can only get some summer temperatures around here.) After today's data I am going to be watching the 10 year treasury rate like a hawk, it is approx. 3.87% as I type this. It's most recent high was slightly over 4%. Higher rates will signal that the fear of deflation is over and inflation is back in the picture; if the cost of borrowing rises too much it could end this nascent recovery quickly and that will show up in stock prices. In summary, watch for higher interest rates then falling stock prices. Otherwise, Obama has dodge the deflation bullet.

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