Obama to Tackle Deficit--Next Year!

“This has been the year of coping with the economic mess. Next year will be the year of coping with the deficit mess that follows the economic mess.”
So says Wall Street Journal writer Gerald Seib. (See “Obama Lays Plans to Tackle Deficit,” http://online.wsj.com/article/SB125599128538995091.html#mod=todays_us_page_one.) “The timing is tricky” because next year is an election year, but Obama is going to do it! Yes we can!

The strategy is a two pronged attack with another strong initiative in the wings. The first go at it will be at the president’s State of the Union address. That’s in January.

Following right after there will be the president’s budget proposals. That will be in February.

Then, well, let’s put together a task force—say eight Democrats and eight Republicans and let them address “the nation’s long-term fiscal imbalances.”

Yes, the Obama administration has things under control.

And, the world goes on.

The value of the dollar has declined by about 13% since January 20, 2009. It is possible that it could decline another 5% to 10% over the next six months or so.

Over the last thirty-eight years, since August of 1971, participants in international financial markets have failed to trust governments that ran up huge budget deficits. The general attitude has been that governments that cause their debt to increase substantially through loose or irresponsible budgets will eventually end up having their central bank monetize large portions of their debt.

In the face of such behavior, investors have sold the currencies of these countries until some appropriate response has been forthcoming from the governments running the deficits. More than a few countries have experienced this consequence of their budgeting largesse. Concern has even been expressed about how a group of “unknown bankers” could have such an influence over sovereign nations. (See for example the book “The Vandals’ Crown: How Rebel Currency Traders Overthrew the World’s Central Banks” by Gregory Millman.)

But, the United States government ran massive deficits earlier in this decade and the Federal Reserve supported such debt with extremely low interest rates while it allowed asset bubbles to run their course. During this time period the value of the United States dollar declined by about 40%.

The situation since January 20 has several characteristics in common with this period: large deficits supported by the Federal Reserve with extremely low interest rates. And, as mentioned above the value of the United States dollar has declined by about 13% since that time.

Talk about a strong dollar is a joke at this time. Talk about getting the deficit under control is approaching the same seriousness.

Let’s face it, Obama owns the deficit now.

As is usual in economics, people and markets have a short memory. The past is the past. The current administration has been in office nine months now. It is a “full term” pregnancy! The child, the current deficit and subsequent problems, belong to Obama.

Markets will not wait for additional speeches, even a State of the Union speech. Daily, there is more and more talk about the inability of the Obama administration to make decisions, to act. It only talks and promises.

People and markets don’t want a task force to address “the nation’s long term fiscal imbalances.” How long will that take? Six months, twelve months, or longer?

The markets need some substance. As far as I can see there is no indication that any “substance” is going to be forthcoming soon. Thus, the dollar will remain weak because what reason is there to buy it?