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Obama’s Conundrum

Posted by Larry Doyle on February 7, 2011 9:59 PM |

Cut the deficit? Promote jobs? Stimulate the economy? Get re-elected?

What’s a President to do?

In the short term, is there any doubt that Barack is fully supportive of Ben Bernanke’s ongoing backdoor bailouts and bubbling up of the market via his quantitative easing programs? Ben made no bones about his utilizing asset inflation as a means of stimulating the economy. Does that mean that hedge funds putting on carry trades in foreign markets are going to stimulate our economy here at home? Really? How does that work?

The facade of a bubbling market can create reasonable ground cover for a whole host of other issues. That said, let’s stop thinking that Ben has the silver bullet to save our economy. He doesn’t. The Federal Reserve — more than any single institution — got us into this mess. Now, the Fed is going to get us out? Call me suspect. Back to Barack.

So how is Barack going to generate jobs and simultaneously bring down the deficit? Let’s navigate to Project Syndicate and review recent commentary put forth by Jeffrey Sachs, an Economics professor at Columbia University. Sachs wrote about Obama’s State of the Union address in his piece,  America’s Ungovernable Budget:

Obama rightly emphasized that competitiveness in the world today depends on an educated workforce and modern infrastructure. That is true for any country, but it is especially relevant for rich countries. The US and Europe are in direct competition with Brazil, China, India, and other emerging economies, where wage levels are sometimes one-quarter those in high-income countries (if not even lower). America and Europe will keep their high living standards only by basing their competitiveness on advanced skills, cutting-edge technologies, and modern infrastructure.

That is why Obama called for an increase in US public investment in three areas: education, science and technology, and infrastructure (including broadband Internet, fast rail, and clean energy). He spelled out a vision of future growth in which public and private investment would be complementary, mutually supportive pillars.

Obama emphasized these themes for good reason. Unemployment in the US now stands at nearly 10% of the labor force, in part because more new jobs are being created in the emerging economies, and many of the jobs now being created in the US pay less than in the past, owing to greater global competition. Unless the US steps up its investment in education, science, technology, and infrastructure, these adverse trends will continue.

But Obama’s message lost touch with reality when he turned his attention to the budget deficit. Acknowledging that recent fiscal policies had put the US on an unsustainable trajectory of rising public debt, Obama said that moving towards budget balance was now essential for fiscal stability. So he called for a five-year freeze on what the US government calls “discretionary” civilian spending.

The problem is that more than half of such spending is on education, science and technology, and infrastructure – the areas that Obama had just argued should be strengthened. After telling Americans how important government investment is for modern growth, he promised to freeze that spending for the next five years!

What is a President to do?  Talk from both sides of his mouth just like every other politician from both sides of the aisle. Hopefully few people will call you on it.

What is a citizen to do? Do not rely on the President or anybody else involved in the political process. Sense on cents dictates that we do everything possible to control our own destiny. Uncle Sam typically just gets in the way.

Navigate accordingly.

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own and not those of Greenwich Investment Management. As President of Greenwich Investment Management, an SEC regulated privately held registered investment adviser, I am merely a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

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