The Republican refusal to settle the budget deadlock may be understandable because if the deficit is not fixed then the country will someday go bankrupt, thus a sense of urgency is correct. However to say that the House members are justified in creating a crisis because if nothing is done there will be a worse crisis in ten years is not right. Two wrongs don’t make a right. Just because the extreme deficit spending will lead to a collapse in a decade if nothing is done doesn’t justify engaging in extremist tactics. As an investment advisor I’m worried about this.

   The proper response is for conservatives to campaign for deficit cutting in the elections of 2014 and 2016 and if they win then they can work to solve the deficit. But to shut everything down leading to a massive Federal default that affects the world economy is not right. Further, many conservatives need to take responsibility for the deficits caused by Bush’s excessive unchecked spending. An investment advisor should take a balanced view about politics.

   The Tea Party is basically a form of Libertarian politics. If the Republican party tries to offer strict Libertarian programs they will lose the 2014 election. Their best bet is to work to attract middle of the road voters both in terms of being ideologically balanced and in terms of good governance such as fixing the short term spending and deficit problems.

   I don’t approve of the ACA but it’s the law and has been approved by the courts. The proper way to end it is by a straightforward vote instead of defunding it by a vote of the House that refuses to cooperate with the Senate and President.

   The end of the world won’t come when the government runs out of money on October 17 because the real crisis will be when the monthly pension and interest payments go out on November 1. My solution is to have asset sales starting with the gold in Ft. Knox which would fund three months of deficits. The buyer would be the Fed who can hire the Treasury to store the gold right where it is now. If Jack Lew signs a sales document selling gold to the Fed and Bernanke enters a few keystrokes to credit the Treasury’s bank account in the Federal Reserve system and all is well. Next comes the sale of the National Parks, National Forests, museums, campgrounds, roads, etc. Sell the Capitol building to Donald Trump and make Congressmembers pay rent to Donald Trump.

   The most ridiculous thing is that the ratings agencies that threaten to downgrade Treasuries actually caused the 2008 crisis which led to the deficit spending that got the Tea party members angry enough to get organized. These rating agencies are evil crooks. They were given a special legislative exemption from lawsuits which they abused to conspire with investment bankers to create dishonest ratings of mortgaged back securities. Then B & C quality mortgages were created by lenders, sold for a day to investment bankers who repacked them and had the package blessed by the ratings agencies and then the package was sold to another bank. Thus the banks were trading B & C quality loans to each other and using rating agencies to make it get an AAA rating. The crash of 2008 was caused by this which resulted in less tax revenue and the need for stimulus programs paid with massive deficits.

   Probably the Republicans will blink, but because Obama has become close with the Wall Street financiers who were influential with Clinton then perhaps Obama will be mentored by them and agree that the highest priority is to avoid a default even if it means giving too much to the opposition. Obama has retreated from his left of center positions that he held in 2008 and moved to become a clone of Clinton who had Rob Rubin as Treasury Secretary. Rubin later became Chair of Citibank which later got a huge bailout. By contrast Republicans come from factory owner and farmer type of backgrounds where they naively assume that financial markets don’t matter as long as they have a 30 year fixed loan. But they don’t realize in a financial crisis markets freeze up causing customers to be unable to buy. There are always people with good reasons for getting a new loan or holding a revolving line of credit which can be shut down during a crisis.

   Regarding the risk that in a decade or two the U.S. will go bankrupt what will happen if the Democrats get their way is that taxes would rise to fix the problem. But that would lead to less economic activity and would result in less taxable income being generated and less GNP and less employment, triggering more people to go on the dole. Ultimately, assuming the country becomes a one party state, the Democrats would move from welfare to workfare and would move towards some kind of military style indentured servitude for doctors to cut the cost of health care.

   When the Labour party took over the U.K. in 1997 Tony Blair kept many of Thatcher’s low tax pro-business policies. If the Democrats raise taxes to exorbitant levels to fix the deficit they may create recession and be replaced. Instead of that happening they may decide to emulate Blair and Clinton with business friendly policies. The interesting thing about ACA pushing employers to change jobs to part time status to avoid medical insurance cost is that this would contribute towards a reduction in low paid jobs and an increase in better paying jobs. The ACA essentially helps large employers who hire well paid full time workers because the employer can now brush people off and tell them to go get a cheaper subsidized (but lesser quality) health policy. But who pays for this? The taxpayers and anyone who has insurance pays with hidden mandates and user fees. Who doesn’t pay? The corporations who use multinational subsidiaries to get out of U.S. taxes. So ironically ACA is part of trend where corporations become more profitable while individuals become worse off. However, this trend would only be applicable, in a convoluted sense, if the minimum wage type of employers gradually go out of business. Then, due to survivorship bias, the surviving jobs would be higher paying, creating the appearance of greater prosperity.

   The outcome of all this financial tension, instability, higher fees and taxes is that more individuals will strive to study their own finances and tax rules and reallocate investments. This could result in people trying too hard to get rich quick with bubble schemes in hopes of getting extra income to pay for the extra taxes and fees or to be able to afford an unsubsidized high quality health insurance policy. The increased market volatility will drive more people to seek professional guidance. There is a good chance that demand for goods and services will be lower because people will have less money left over after experiencing higher taxes and user fees. Of course the additional doctors hired could offset some loss of demand.

 

   I wrote an article “Federal budget deadlock – is the economy doomed?” and “What changes will occur in 2014 elections and their effect on stocks”.

   Investors should seek independent financial research or independent investment advice which is best delivered by a fee-only financial advisor.