Monday, May 12, 2008


The 44th. President of The United States will inherit a financial house in state of disarray. Upon assuming the Office, the new President will have to be furnished an unobstructed perspective on a slowing economy clouded with surging inflation baring its indignant and unprejudiced fangs. Add, to the context of this vista, the enormous interest on the national debt, along with the long term consequences of sustained budget deficits of the size America has been consistently incurring, and you have potential for serious adverse impact on the social fabric of the country. First and foremost, this troubled and uncertain economic scene has to be effectively addressed.

The recent rate of commodity price advances, particularly oil, and the resulting hikes in the costs of goods is unsettling all forecasting based on economic indicators and cycles. Price escalation on certain products will simply reduce their consumption, however strong price increases in all staple goods are placing hard upward pressure on inflation, and demand continues unabated. These price pressures are coming in significant measure from a large number of developing countries that have created a demand that was not present in the pressures responsible for the wild inflation swings of the mid 70’s to early 80’s.

There is debate as to how inflation should be calculated, however, Inflation rates are currently fundamental measurements dependent on the contents of the basket of prices used for the calculations. Such calculations can be manipulated. Accurately defining current inflation toward the higher levels might not be advantageous if it were shown to be at a rate of 8%, for example, instead of the 3.9%, while ten year treasuries are at 4%. A central bank may enjoy the current understatement of inflation, and such understatement might also serve to minimize government liabilities which are indexed to the floating rate, like Social Security. Furthermore, a high level of inflation would suggest stagnant, if not contracting GDP. Then if this isn't enough to unscramble, we will likely see a reduction in total lending which will incite the winds of deflation. Amidst the confusion of reporting, the new President will have to provide some guidance and leadership to the Federal Reserve, rather than humbly await its decisions, and doing so will require accurate, untainted information. Altering the course on the Fed’s current strategy to continue dropping interest rates would affect inflation and the current slowdown inversely, making any decision difficult.

From the perspective of any conventional analysis and whatever the published inflation rate might be, the reality is that purchasing power of the dollar, meaning the purchasing power of the taxpayer, is dropping. That is the critical element that all taxpayers can feel without being fed convoluted or distracting statistics. Their real income is shrinking.

The medicine, which may well include higher government revenues coupled with reductions in spending, while initially having a bitter taste, would satisfy one critical leg of managing any government, that of paying current bills without laying off staggering debt onto future generations of taxpayers.

The current economic climate and feelings of uncertainty affecting North America differ from those of previous downturns in relative breadth and depth, and require unique solutions. Even a decision to overtly confront the challenge would be reason for applause since it would present a sign of impending responsible governance.

The 44th. President with have to rapidly re-establish a long lost sense of confidence, that perennial footing upon which national and international leadership, as well as economic progress, are built. The new White House will have to assertively confront the fiscal challenge, sell it to the taxpayers, and energize Congress to support the required major budget overhaul toward sound fiscal policy.

1 comment:

  1. "The medicine, which may well include higher government revenues coupled with reductions in spending,"

    The only problem with that is that higher taxes usually result in lower revenue and a slowing economy.

    Secondly the real problem isn't government spending but entitlement programs.