Sunday, January 09, 2011

Prognosis for the Economy and Political Landscape

We'll see what happens with the economy and the 2012 presidential election.

With regard to the payroll tax cut, I like that, as I'm not worried about the deficit. Most people don't understand that the so-called national debt is not really debt, and won't have to be paid back with higher taxes. U.S. Treasury bonds are more similar to cash than to debt. Treasury bonds pay interest and cannot be directly used as currency, but they are the most liquid of investments and are readily convertible to currency. The Federal Reserve exchanges Treasuries for cash, and vice versa, all the time. That is not really printing money, since both Treasuries and reserves are money for all practical purposes. You may have heard of Quantitative Easing 2 (QE2) which is an ongoing program in which the Fed is buying $600 billion of relatively long term Treasury bonds using cash reserves created out of thin air. This is merely exchanging one form of money for another and is basically a nothing burger.

The reduction in the payroll tax (along with the other tax reductions) does increase the government deficit and the net savings in the private sector, since by accounting identity the government deficit equals the private sector surplus. This is generally a good thing when unemployment is high and the private sector needs a boost. Since we now have an unprecedented 25 million people underemployed, continuing government stimulus is desperately needed. Given the widespread misunderstanding of how the monetary system works, and the Republicans' successful use of deficit hysteria to subvert needed governmental action and thereby torpedo the Obama Administration, I fear that the Obama Administration's economic program will continue to fall short. We'll see.

Here's just one example of our current economic problems, from CNN Money.com --
Las Vegas home prices won't return to their pre-recession peak until after 2032; in Phoenix, the rebound will take until 2034; and Salinas, Calif., and Naples, Fla., won't come back until sometime around 2038...
For non-bubble markets, the damage was usually much less severe. Cities such as Pittsburgh, Syracuse and Rochester, N.Y., Clarksville, Tenn., and Spokane, Wash. will be back to their peaks within three years or so, Chen said.
Many of the larger, older metro areas that saw moderate or even fairly high home price appreciation during the boom years will recover faster than the bubble markets but slower than the steady-eddie ones.
Washington will return to peak by around 2025, Chen said. Boston and Chicago will recover by about 2019, and New York by 2021.

Houses are frequently used as collateral for loans. Thus, high housing values resulted in a tremendously increased money supply in recent years, and this money source is going into reverse as housing prices fall. The recent tax cuts, including the payroll tax cut, will not be large enough to counteract the contraction of the money supply resulting from the collapse of the housing market and the larger contraction in consumer credit.

On a more upbeat note, we all seem to agree that the Republicans are living on borrowed time, as they are obviously hypocritical and ineffective at governing. Whether Obama gets the upper hand in the next two years, or the Democrats are forced to dig deeper while enduring another Republican presidency, the eventual outcome will hopefully be a move back to the center, and restored sanity in the national discourse...


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