We’ll Keep Printing, Will They Keep Buying?

I have been concerned about all the money being pumped into the economy and the inevitable inflation that will result. However, the symptoms of inflation (Consumer Price Indexes or CPI) have been mild (by model definition) or perhaps even disappointing to Fed Chairman Bernanke. He wants to re-inflation the economy to help turn around housing and employment/wages. Why he wants to prolong this recession by preventing prices to reach equilibrium is an open question.

We do know is that all of this money is holding up or levitating GDP. And we know that to keep GDP going, we need to keep printing money. We can do it because we are a sovereign country and can print as much money as we want (not without consequences however.) We are currently borrowing 43 cents out of every deficit dollar we spend. The problem is that the Federal Reserve is buying about 40 percent of these dollars followed by China and Japan. Will these buyers continue to buy our Treasuries?

I am not sure. One reason is that the Federal Reserve’s Quantitative Easing (QE2) policy of buying $600 billion in bonds will end in June. Who is going to pick up that 40 percent in July? I have been saying that the Fed will probably initiate QE3 because they have to keep it going. The next election is not that far off.

What does appear more certain is that we will keep spending and printing. The rumor yesterday was that Congress has reached a compromise to cut $33 billion (less than 1%) of the budget. If they (both parties) can’t cut even 1%, how are they ever going to extricate themselves from micro-managing our mixed (or Statist) economy.

Will The Government Continue To Pump Money Into The Economy?

I spent most of last week in Auburn, Alabama at the Austrian Scholars Conference where I listened to 40 presentations on various aspects of the economy from Austrian (or Capitalist) economists. It was excellent. I thought I would share one of my "take home" ideas on government spending (fiscal and monetary).

I think the government will continue to pump money into the economy (financial system) to keep it afloat. Most of the "growth" in GDP growth is from the government and the amount of GDP growth per dollar spent is declining. I am assuming that if the economy were really turning around based on private investment and spending, the government would stop injecting borrowed money into the system.

There is a lot of talk about the election of "Tea Party" legislators and their willingness to reduce spending and begin to get government budget under control. I don't think that will happen. The Republicans are proposing a $60 billion reduction in spending (1.6%) and the Democrats have countered with $6 billion in cuts.

Neither amount is significant and the focus is on cutting a few dollars out of the budget. However, the focus should be on the cause of overspending not just the symptoms of it. Why are we overspending? Why are we willing to borrow 43 cents of every dollar we spend? For what purpose? For whose benefit?

For example: Why are we spending $800 billion a year on "defense" which is 50% of what the world spends on defense? Why have we politicized science: one administration spends billions on programs to get us to Mars (Bush) and the next administration (Obama) shuts down those programs (wasting that money, education, etc.) and then redirects billions on satellites to monitor global warming instead? Why do we have a government (both administrations) that spends hundreds of billions to bail out banks with taxpayer money when these banks could have saved themselves? These are the kinds of questions we need answered before we are going to get serious about priorities and cost reductions.

Therefore, I expect to see one or more of the following: Quantitative Easing III (the Fed printing more money) and or the Fed keeping interest rates low for a much longer time (well into 2012) and/or more "stimulus" programs (we haven't solved our problems yet.) This of course has implications for both business and investment planning.

What's Next For The Market?

Technically, the market is at an inflection point. According to the Dow Theorists, if the Dow breaks 11,823.7 if would signal a correction and even put the market into another bear market. While technical analysis can be correct sometimes, it can also be incorrect sometimes. If it always worked, you could buy the right algorithm, kick back and relax. But, on the other hand, many traders follow the Dow Theory and that alone could move the market for a while.

We do know that the markets are levitated due to government spending and require additional government spending to keep going. So far, talking about cutting government spending is just talk; nothing significant has actually happened. I suspect cuts, if any, will be minor (less than the $1.5 trillion needed to get us a balanced budget.) Therefore, for the moment, I assume overspending and quantitative easing will continue, maybe for years.

also, Fed Chairman Bernanke has the stock market targeted as one of him main objectives. He wants the market to go higher so “animal spirits or greed” will kick in and take over so “real” consumer spending can take place. Therefore, If the market should sell off to 10,000 +/- (about a 15% drop), I think the government will intervene with both stimulus and more quantitative easing (printing money.) After all, it’s only 19 months to the next election…and voter pain will not be tolerated.