Death by Politics

A lot of people, including some advisors to our administration, have been seeing our current situation - as in the crisis for the past two to three years - for what it is. Volcker is one that comes to mind, but there are many others. And some recognize that the fundamentals are, if anything, worse than they were two years ago due to vastly increased sovereign debt. It does not take a genius to see that this train is still coming down the tracks. I had a friend over a couple of weeks ago for dinner and he asked me where I see things going. I said I have no idea on where the market is going - I have given up there - but I know the fundamentals still suck. And they do. This does not take a PhD. I link here a very informative post by Michael Panzner at Financial Armageddon where he goes through very thoroughly some of the issues facing us and it is not pretty at all. I highly recommend his books and his blog as he is one of the few that saw this train coming in 2006 or earlier and who, despite a meteoric rise in the market the past year and a half, still sees the underlying issues as insurmountable under our current approach.

http://www.financialarmageddon.com/2010/05/onetime-items-making-things-a-little-better-than-they-otherwise-would-be.html

Now I noted to my friend I have given up on any short term prognostications as you cannot underestimate stimulus from the government. When the market dove just a week and a half ago due to problems in Greece, I predicted a stimulus package would save the day. I did not expect the nuclear option that appeared, but I knew something was coming. You see, politicians cannot let anything happen that will hurt the chances of their party winning an election. Damn the people, the politics are what matters.

I see this happening a lot in the U.S. I agree that some of the earlier government actions in the financial crisis were necessary to avert immediate financial Armageddon, yet the government then did not stop the stimulus and did not focus on what mattered. They were not willing to entertain the thought that we needed short to mid term pain to have long term gain. They were unwilling to accept that we here in the good old U.S. of A. needed some of the same austerity measures that those in Greece are rioting against and that our money needed to go to paying down debt, not increasing it. Accepting this would have cost votes, which is unacceptable by both parties.

Now I realize that even if a political party had the will to do this they would be voted out in two to four years and the other party - on a mantle of "change" - would come into power and reverse all the good that had been done. Moreover, the austerity measures that we and the rest of the world need will take a good decade or two to achieve their goal and it is a smoke dream to think this will ever happen with elected politicians. We, as a people, will certainly vote out anyone giving us pain.

China, ironically, may have the ability to weather this storm the best - though so far they are not showing any gumption to do so. The government there has absolute say and they do not have to worry about re-election. Sure they do not want people rioting in the streets, but they can nonetheless take some rather draconian measures to put their economy back on better ground. If only they could enforce this for the countries to whom they sell stuff.

And so our politicians are forced into a trap. They cannot enact measures that will be painful and that will in a decade or two make things acceptable. Instead, they have to throw money at immediate problems and allow the next bubble popping to serve as the excuse for the problem and the painful cure. The problem needs to raise its head first as there is no political will to take our medicine and avoid it happening.

Make no mistake, we could decide to take extreme measures, reduce debt (both private and public) and live through a sustained period of recession. Unfortunately we seem unwilling to do so, personally or politically, so I suspect we are doomed to something even worse. The recession of 2007-2008 is about to become a walk in the park in my opinion. Hunker down folks as there is no politically acceptable option to a lot of future pain.

Disclosures: None.