Short Sighted

I have taken a step back from posting over the past few months as I have viewed the situation in the U.S. and most other places as temporarily stable. There has been nothing short term to sound alarm bells and I realize my concerns have increasingly become long term. Still, in time, the long term does become the short term, so I offer some thoughts on the long term.

First, let me observe that the government in the U.S. (and especially the Fed) has absolutely no long term planning. It is all about the here-and-now and how to win the next election. It is all about improving current employment numbers, stock values, real estate values and the like, with little to no consideration of what is right for us in the medium and long term. Replacing old debt with more new debt seems to be no issue at all, despite its foolishness from a long term perspective. And it is not just the government. Some prominent economists are on board with this. Just check out Nobel Prize economist Paul Krugman, who is all in favor of throwing more money at the current economy to improve short term numbers:

http://www.nytimes.com/2011/03/04/opinion/04krugman.html

He is critical of any austerity at this point and in favor of throwing more money at the situation. He points out that austerity measures, according the the IMF, do not support "economic activity in the short term." Freakin' A they don't!! Austerity measures are not about short term economic benefit - they are about avoiding longer term massive deficits that lead to much larger problems!!!! Duh, get a handle on this Paul. And the money Republicans are talking about saving in austerity measures, roughly $60 billion last I saw, is laughable. For true austerity to have and impact, it would have to be many, many times that amount. Keep in mind that the extended tax cuts and other measures agreed to by the Administration and (newly
Republican controlled) Congress in December are going to be roughly ten times what Republicans are seeking to cut in these austerity measures. So as they pound their swords on their shields and claim success, I for one am marking the fact that they demanded in the first instance to keep tax cuts in place for the really wealthy that wholly outstrip and austerity they have suggested.

This is not to say the Democrats are doing better. Yes, we would be better off if the extension of tax cuts was not extended to the really rich, but compromising as they did was the worst long term solution possible. And, unlike the Republicans, they are unwilling to make other budget cuts to make up for this mistake. Indeed, given our mess I would support an end to all the Bush tax cuts at all levels to help the deficit, but those seeking reelection in the future would never bite this bullet.

Having cleared this off my chest, let me give a very brief overview of what should be keeping you awake - not today or tomorrow necessarily, but certainly over the next decade:

1. As noted above, the US deficit is at a critical level and getting out of control. This is leading to a serious devaluation of the dollar and, as the dollar gradually loses its reserve currency status, will lead to major financing woes for the US. The Fed is the last major buyer and when QE2 is done later this year there will likely be serious issues that will require real austerity measures instead of the minimal stuff suggested to date.
2. Inflation is in the cards whether you like it or not. Initially people feared all the Fed and government stimulus would lead to inflation, but it did not as it did not really do much to revive the economy. Nope, inflation is due to increased overseas demand, especially China, agricultural issues in various countries, civil uprisings in the Middle East and idiot speculators driving up the prices on some commodities. It will lead to further problems in our economic recovery (if you want to call it a recovery).
3. The EU problems have faded recently but have certainly not gone away. Recent elections in Ireland could lead to a new round of intense negotiations between it and the EU and IMF. Citizens of Ireland are rightly questioning why they should go through decades of recession to pay back debts, at 6%, they incurred to the EU to save Irish banks that owed tons to other EU banks. In other words, "why am I paying through years of recession to save the bastards that caused the problem. Those lending to Irish banks during the bubble should be paying the price instead." I for one share tne sentiment in the U.S. as that is precisely what the government here has done (save the bastards with our tax dollars) but we inconveniently do not have an easily identifiable target like the EU with which to renegotiate.
Now this could get to be rather a sticky situation. Ireland will undoubtedly use the threat of all out default to renegotiate something better than 6%. After all, something like 10% of the national income for the country is going to interest payments alone. So, at a minimum, you can expect them to seek a much lower interest rate if not no interest at all, with deferred payments. With the default hammer, the EU will have to listen.
You think, however, that default is not an option. Well, ask Iceland or Argentina. It turns out it is not that bad of an option, assuming everyone is not doing it at the same time. You see lenders do not look too much at a country's FICO score. They concentrate more on future ability to pay debts. And defaulting on past debt means you are a risk but it also means you have a great deal more capacity to pay off new debt. Now there are other nasty repercussions to default that will likely keep Ireland from going there, but they most certainly will be looking to strike a much better deal with the IMF and EU. And if they do, the other PIIGS will be close behind. For a better discussion of this I highly recommend John Mauldin:

http://seekingalpha.com/article/255652-when-irish-eyes-are-voting

4. The Middle East - need I say more. Who knows what is going to happen there and what impact it will have on oil prices or other economic factors. At a minimum the situation there will be very volatile for several years to come (more so than usual that is).

5. Global Climate - This is probably very long term but we are in the midst of a shift in our climate. I am not just talking global warming here. Our magnetic north is shifting and at a sharply increasing rate, roughly 40 miles a year toward Russia due to core flux. Scientists are speculating on the implications of this for global weather but most do not see it as beneficial. This does not keep me awake at night too much but I thought I would add something to the mix that you have not perhaps already read about.

Disclosures: none.