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The Reflation Bill Is Outstanding and Growing

Posted by Larry Doyle on April 5, 2010 11:13 AM |

If we are to believe the markets are predicting a rebound in the economy (I do not blindly accept that to be the case), then it is high time we address the next enormous question facing our country. That is? The bill that has been accruing for the ‘so-called’ saving of our economy.

Whether the economy has been saved or not is a relative question. Please be careful as to how to use that phrase in light of the fact that there are 6.5 million people out of work now for at least 27 weeks (long term unemployed) and close to 17% of our labor force is underemployed.

The biggest question facing our country now is how do we pay for cleaning up this mess that was created over the last number of years? 

As the money that has been pumped into our system sloshes around without truly having gained real traction or velocity, we see signs that America’s bill is increasing. The Wall Street Journal touches on this critical point this weekend in writing, The 2010 Recovery:

As we look beyond this year, the bill for this Great Reflation will eventually come due. Coming out of the last steep recession, in 1983, both interest rates and tax rates were coming down. Today, they are both headed up. In 1983, the regulatory state was in retreat. Today, it is expanding across most areas of the economy.

A huge tax increase hits on January 1, as the Bush rates expire. Sooner or later, the Fed will get off zero and interest rates will climb. The neo-Keynesians who have dominated U.S. economic policy since 2006 are betting—hoping—that the expansion will have built up enough steam to ride out these and other growth shocks. The rest of us have to hope they’re right.

‘Hope?’ Throughout my career, I have always viewed ‘hope’ as a lousy hedge and certainly not a good business practice.

In regard to interest rates moving higher sooner or later, sooner is winning that race right now. 10yr Treasury notes are poised to break through 4.0%, 30 year fixed mortgages are approaching 5.5% and, in my opinion, heading to 6% given the fact that the Federal Reserve’s quantitative easing program has ended.

Two primary natural resources used in a wide array of economic activities are making new highs for this period. Which are these? Oil is currently trading over $86/barrel and copper is over $3.60/lb..

Taxes are headed one way…and it’s not lower. Additionally, do not be surprised to see the Obama administration look to launch a value-added tax in an attempt to generate revenue from consumer driven activities.

While the neo-Keynsians are hoping the recovery can overcome these growing headwinds, the fact is the size of our problems will inevitably force future generations to pick up an enormous tab.

That is no legacy to leave our children.


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