Will the Midterms Make a Difference?

11/01/2010 3:20 pm EST

Focus: MARKETS

Terry Savage

Author, The Savage Truth on Money

Does it matter how Tuesday’s vote turns out? Of course, it matters that you vote. Otherwise you haven’t earned the right to complain about anything that Congress does—or doesn’t do—in the next two years.

But as the political analysts examine the possibilities, the real question is whether it will make any difference in the policies that will affect our economy over the next two years.

The political possibilities are vast. The election could result in a Republican takeover of the House, and a possible Republican majority in the Senate.

There’s even the long-shot possibility that the Tea Party candidates could split the Republican and independent vote—leaving the Democrats with more power than anyone anticipates.

Then, to complicate matters, no one really knows how the Obama Administration will respond to the ultimate outcome. The result could be gridlock—or compromise.

But once the numbers have been counted, the impact on the economy could be dramatic. It’s as if the financial system has been sitting on a see-saw (or teeter-totter), depending on where you come from. Right now, it is pretty well balanced between the possibilities of future inflation and looming deflation.

The stock market always hates uncertainty, so it has recently been poised between those two alternatives. The recent higher bias of the market (and gold) seems to point to an eventual inflationary resolution. The possibility of even more deficit spending and stimulus makes stocks attractive despite the economy: All of that money has to go somewhere.

And the election’s outcome will have an impact on the Federal Reserve, as well. Now, we all learned in Econ 101 that the Fed is not impacted by politics. We did learn that, didn’t we? But the Fed’s governors and its chairman, Ben Bernanke, are not oblivious to the outcome of this election.

They’re poised to print money—or, as it’s now called, “quantitative easing.” If the Fed suspects that gridlock will be the political outcome of the election, it might be more inclined to buy bonds and create liquidity. After all, someone has to keep the economy from going down the deflationary drain.

The really big questions to be decided by this next Congress revolve around taxes, deficits, and trade. They may also revisit health care, and even financial reform. It’s certainly not clear that even a Republican majority will do the “right thing.”  After all, the last time the Republicans ran Congress, they racked up huge deficits in the midst of a pretty good economy and growing tax revenues.

There’s plenty of opportunity for change when the new Congress is seated in early 2011—and plenty of opportunity for mischief when the current, lame-duck Congress meets again briefly in December.

What do you think will happen? Is gridlock the best we can hope for? We’re on track for more slow growth, and more deficits. Can we afford to not do anything for the next two years?  Will the world let us get away with that kind of indecisive policy?

And is there any chance of productive compromise to set our country on a better course?

So, by all means, vote. But have your say here as well. Please join the conversation and tell us what you think.

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