With the budget pressures in Europe, it appears that Sylvio Berlusconi will be forced to cut back on his infamous Bunga Bunga parties in a valiant & selfless effort to save the Euro; but not to worry, Ben Bernanke is ready to fill in that party gap with a big U.S. Monetary Party, stateside!
At his September 8 speech in a small city outside of a more famous, but fictional, Minnesota town, Ben Bernanke reiterated his "pedal to the metal" monetary policy for the next year or two. More specifically, he said, "the target for the federal funds rate would [most likely] be held at its current low level for at least two more years." (Economic Club of Minnesota Luncheon, Minneapolis, Minnesota)
Given that the current target rate is already near zero, that pedal is pretty much down on the metal, as far as it can go, leading some pundits to wonder if the Fed has pretty much done all it can do. Even Ben Bernanke himself, suggested that the ball is now in the court of the fiscal authorities, namely Congress & the President, when it comes to further stimulative action, in an apparent effort to play the "opening band" role for the President's big jobs speech later that day.
During Year 3 of a Presidential Administration that has proven decidedly disappointing on the economic front, however, one begins to wonder whether the fiscal authorities are really in a position to do much of anything either, as far as economic stimulus goes. Facing the lowest approval ratings of his Presidency and a Congress full of rabal rousing Tea Partiers, how much can Obama & the Democrats really do on the fiscal side?
Obama's tax cut plan may gain some traction, as a more supply side stimulative effort supported by Republicans; and that will have an important effect, when & if it kicks in. But, what else will the Republicans, particularly the Tea Partiers, support?
Well, it seems that another powerful player in this drama has also made His voice heard. Just as Almighty God bestowed our core liberties upon us and inspired the American Revolution, He is not going to let this moment in U.S. fiscal history pass, without interjecting His voice into the debate. Three important Acts of God are being factored into these decisions as we speak.
Hurricane Irene and the Washington Earthquake have rattled Eric Cantor's constituency, and he is now presenting a much more soft and friendly face to the Obama administration. And, the Texas wildfires have changed the tone of even the most right-leaning Senator, John Cornyn, when it comes to relations with Washington.
Both Cornyn and Cantor, two of the most stalwart deficit fighters, are now asking for disaster assistance from Washington, leaving other Tea Partiers nationwide wondering what has gotten into their once fearless leaders. After all, there is no explicit delegation of power and/or responsibility for disaster relief in the United States Constitution, so - by the 10th Amendment - that leaves disaster relief in the hands of the States and/or the People. And, given that the private sector insurance industry is capable of insuring so many other risks in our economy, why can't the private sector insure against earthquakes, hurricanes, wildfires, and other Acts of God?
These Acts of God are a test of the Tea Party. God is testing the metal of Tea Party leaders, for all to see. He wants to know if they are really made of the same stuff that the original Boston Tea Partiers were made of. Given that fully 25% of the American colonial population of those days gave their lives for our great republic, that is a high standard, indeed. In today's terms, that would translate to 75 Million deaths, a lot more than any natural disaster in U.S. history; and they certainly had no U.S. Treasury or Federal Reserve Bank from which to ask for assistance, only long cold winters and summers filled with manual, farm labor.
Why can't the States, or even families and churches, provide temporary housing for those displaced by these events? Why do these so called "Tea Partiers" suddenly succomb to the same evil temptation to fall back on the US Treasury, which Republicans and Democrats do? So far, it appears that two of our most prominent Tea Party leaders are failing that test and that yet another political label is needed: "TYPO" (Tea PartY in name Only).
It remains to be seen what the President & Congress will agree on, as far as fiscal policies are concerned. The fiscal debate is complicated by this new budget commission and its formal mandate. Some form of tax cut may emerge, but then again, it may not, because there is no way to pay for it. One thing and one thing only is for certain in this great republic of ours, and that is that the fiscal "future is uncertain, and the end is always near" (to quote the infamous singer song-writer, Jim Morrison).
The monetary future, on the other hand, seems more clear. Our fearless Federal Reserve Chairman has another pedal, which is not yet down on the metal; and this one fires the "booster rocket."
Not satisfied with his $2.4 Trillion stash of US paper, Ben is getting ready to buy more, this time on the long end of the curve, in an heroic effort to save the housing market from further price declines, stimulate new refinancing business for the banks, lower the mortgage burden of millions of hard working homeowners, and salvage Obama's re-election campaign.
With 30-Year yields still relatively high, at 13X the Federal Funds Rate, there is still quite a bit that Big Ben can do with this Monetary pedal. Given his nature and his fears of the Great Depression, further monetary stimulus seems more likely than not, especially in light of the uncertainty and so-called austerity in Congress.
Those who complain about low yields on their savings might do well to consider the words of Polonius, when he said, "Neither a Borrower, Nor a Lender Be." (Hamlet Act 1, scene 3, 75) With the 30-Year Bond Rate headed to 2.50%, or lower, equities will become increasingly attractive.
The S&P 500 may head lower in the next month, or so, as the markets continue to struggle with the Greek situation, US fiscal uncertainty, and global economic growth concerns. Indeed, this citizen believes it will test 1050, where it will form the head of a head & shoulders bottom.
Then it will turnaround and head higher on a massive, new bond buying program from the Fed, which pushes long bond and mortgage yields to historic lows, and teaches investors that, in the end, Polonius was right. It is better to own equities, than to be a borrower or a lender. They are a "must have" for the coming monetary party to be thrown by Ben Bernanke et al.
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