The Politics of Debt

I found a very interesting article this week by Jeffrey Cooper at Minivalley.com. Of course, articles are always interesting when they reinforce our ideas, so I may be biased. That said, Cooper makes a comparison among the Fed decisions in 1927, 1988 and last weeks’. In the first two cases, the Fed’s decision sparked extraordinary bull runs that ended up in crashes. To understand why this happens, you may want to read my previous article At a financial crossroads.

When the concern was about a “credit crunch” and Bernanke was saying he was not going to bail out the banks and people involved in the mortgage mess, I wrote that his solution was, actually, to do it all over again. Basically, his solution and Bush’s solution fit a pattern, and are directed to benefit mostly Wall Street.

Am I contrarian with good luck? Or maybe I found out part of a pattern that is allowing me to predict what’s going to happen in the short term. We will have to wait and see to know the answer because it is very easy to overlook key components in complex financial-political patterns, and when you miss those, the results may change amazingly.

So far, I am on the right track, and here are some of the premises I’ve been basing my analysis on:

1. We are at war

The administration will not allow a mere economic correction to reduce the tax basis and create social turmoil when they already have the lowest approval ratings since Nixon. However, to support the war effort they are creating the conditions for runaway inflation in the near future.

2. The Bush administration thinks that presidential prerogatives in time of war make it legal for them to intervene in the economy

They will not act as fiscal conservatives, and they will not act as conservatives at all. They will continue to use the FDR model with a twist. If FDR put people to work in inflation producing enterprises to give them money, the Bush administration is producing inflation to give money to Wall Street so they can finance industries, so people get money (the trickle down effect/theory).

3. There is not such a thing as free markets. The US market has been a regulated market since the 30s. The stock market is not a free market, it is legally regulated and the government has legal means in place to prevent panics and crashes.

Do I think that they can prevent crashes? No. I think that the path they’ve taken will bring us to a horrible correction, brought about by runaway inflation in every form of asset you can think of (and some that haven’t been invented as of today). However, I don’t think we are there yet, these processes take time. I don’t think the recent tax cut will be enough to create this scenario, but the next two rate cuts will. Maybe the next cut comes during the possibly upcoming October correction, followed by another in January, after disappointing Christmas sales.

In the meantime, let the party begin, because we will be dead tomorrow.

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Tags: approval ratings, bank, banks, Bernanke, Bush, Bush administration, complex, contrarian, credit crunch, Economics, Economy, Fed, fiscal conservatives, government, index, inflation, jeffrey cooper, oil, social turmoil, tax basis, theory, time of war, United States, Wall Street, War