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Did Washington Save the Economy? Part 1


A "jobful" rebound is unlikely to goose the recovery.

Now, after keeping the economy on life support for the better part of two years, it appears that incremental public sector borrowing is about ready to succumb to the limits of Peak Debt, too. The cause this time will be the vigilantes -- and not merely the bond-trading kind whose footprints are becoming more visible as 10-year Treasuries approach the 4% threshold. The more pertinent vigilantes are the grass-roots kind. These tea party activists and their sympathizers appear to represent a broad, spontaneous uprising of the citizenry which is in the process of putting paid to the insanity of multi-billion bailouts for insolvent banks, rusty autos, and busted mortgages.

It needs be remembered that these fiscal rubes have been, and will remain, unmoved by the daily tutorials of Professor Krugman and his fellow traveling Wall Street pitchmen -- touts who otherwise are pleased to call themselves economists and strategists. As the latter see it, borrowing another (say) 40% of GDP (thereby raising the publicly-held Federal debt from $8 trillion to $14 trillion) would be no sweat if it's needed to off-set the continued, massive loss of private spending. To be sure, these earlier, higher levels of private consumption rested on an essentially counterfeit economy -- people spending what they didn't have by borrowing what they couldn't afford. But never mind. When it comes to the GDP numbers, Washington and Wall Street are of common mind: the higher, the better -- even if it requires the essentially fraudulent conversion of un-repayable debts into current income and spending. In any event, we're unlikely to learn how far this primitive Keynesian theory can be pushed because the unwashed tea party herd is truly something new under the political sun. The anger against America's fiscal recklessness, and especially its egregious dispensation of taxpayer cash to Wall Street train wrecks, seems poised to shut down any new deficit-financed "stimulus" in the months ahead, and then to send the Pelosi Congress packing come November.

Accordingly, the most probable scenario is two and one-half years of bitter fiscal warfare and stalemate between the Obama White House and, if not a Republican Congress, certainly a divided, dysfunctional one. This prospective impasse will guarantee that no progress can be made in reducing the crushing long-term deficit; nor will it permit additional short-term fiscal booster shots to what's likely to be a struggling economy. During the period ahead, the bond vigilantes will have plenty of time to fret over the $2 trillion per year of new debt financing that's already baked into the cake under realistic budget assumptions. At the same time, the personal income accounts will cease to be flattered by any growth at all in transfer payments and government payrolls. The $400 billion income "make whole" that has been obtained since the eve of Lehman's demise is over and done.

Having thus reached the likely political limits of its ability to authorize incremental borrowing on the public accounts, Washington's hothouse economy is heading for a growthless coma -- a prolonged stagnation that will sustain neither today's giddy EPS estimates nor the capacious capitalization rates being applied to them. And that's where the bad news in the March jobs report comes in.
No positions in stocks mentioned.

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