What about the 2011 Outlook

Feb 9 2010

The Obama US budget just unveiled involves $3.8T, $1.6T of which involves debt. Even in an era of gigantic numbers, this one is HUGE. Consideration of its impact is being pushed to the side at the moment with all the hand-wringing over European debt, but this cannot last for long. Sooner rather than later, investors will return to this enormous and sobering reality.



And the reality is this. It wil enormously cramp the US ability to grow its economy, which in turn means its employment. Counteracting the effect in the very short-term, 2010 is an election year. The large unspent balance of the US stimulus bill will go into the economy during the next few months. Demand for labour will have to rise through this summer and show up as positive numbers at least until January 2011. Also, interest rates will be suppressed by every means possible until then. Pressure on commercial banks to make new loans during the months immediately ahead will be very high as well, leading to monetization of some of the system's capital and increase velocity. The PR machine will be flooding media with data pointing up. After the votes are counted, all bets are off.


The resulting pullback, encouraged by a new populist outcry for cutbacks by groups like the Tea Party movement that do not seem to appreciate the consequences of what they are doing, will hit hard. Financial problems that are being papered over will break wide open in California, Florida, Ohio, Michigan, Indiana, North Carolina and several other states. At that point, the need to cut expenditures will impact public need for entitlements and public services in a major disruptive way.

It is hard to believe that more money will not be printed to "solve" the problem, not just of the federal government but these states. Others will immediately want their share if money is being handed out to cover property tax shortfalls. Without a recovery in housing construction alone, which with related expenditures on appliances, furniture etc, together amout to about 20% of total US GDP, there will be no real economic and jobs recovery. Pensions will be in jeopardy. (In Canada, the Harper government has already set an ominous precedent by agreeing to covering the shortfall in the private and bankrupt Northern Telecom pension. People with perhaps no pensions will be taxed to pay for those who have, but in this case were never on the government payroll. The fact that the bulk of those affected live in a hotly-contested Ottawa-area riding will not stop the outrage if the same largesse is not provided to other companies). If it has not happened by the January-February 2011 time frame, these financial events spell serious trouble for the US dollar that could make the Euro effect appear mild.