Next week’s economic reports presented by Fawad Razaqzada, Market Analyst, Forex.com....
Where We Stand Post-Election
11/20/2012 8:30 am EST
There was plenty of speculation about what the elections would tell us, but now that they're over, it's the best time to assess what the implications are for the market short and long term, note Mary Anne and Pamela Aden of The Aden Forecast.
The US election was close, and it created a lot of uncertainty. In the end, Obama was reelected. Whether you’re happy with the results or not, at least we know what we’re dealing with for the next four years.
In recent weeks, many of you have asked how the election would affect the markets and the economy. Now we have a better idea. The programs, strategies, monetary policies, and market effects will generally be more of the same.
As far as the big picture is concerned, it would’ve clearly marched on, regardless of who won the election. We know some of you might disagree, but here’s what we mean...
The US debt is soaring. Not to rehash this issue, but it’s important to note that debt has continued surging during both Democrat and Republican administrations. The debt started picking up momentum under Bush, and it intensified under Obama.
Over the past four years government debt has gone from $10 trillion to $16 trillion, and it’s been growing over $1 trillion each year, which is essentially the annual deficit that gets piled on to the debt. We know this can get boring after a while because the numbers become meaningless. But the bottom line is, total debt and liabilities (Social Security, Medicare, etc) works out to about $1 million per taxpayer.
Then there are the baby boomers to consider, who will be retiring over the next 20 years. This will result in more expenses and more spending. So we’re quite sure the trillions in debt will keep stacking up in the years ahead.
Historical Monetary Expansion
This means the “printing press” will also continue running. That’s because money has to be created to pay for all the growing debt, and Bernanke will make sure of that. We’ve certainly seen this in action in recent years. The monetary base has literally soared since the Bernanke Fed embarked on its massive stimulus programs in 2008.
And now that Obama’s in for another four years, it’s safe to assume that these monetary policies will remain in place. Bernanke has said many times that the Fed will do whatever it takes to keep the economy going.
They’ll stimulate the economy for as long as it’s needed under the current QE3 program, and they’ll keep interest rates near zero for years to come. They’ll also keep buying massive amounts of US debt.
A Weakened US Dollar, Eventually
So as the debt grows, so will money creation, which is not only inflationary but it’ll also weaken the US dollar further. It’s basically cause and effect, and it’s already happening...
Food and gas prices, for example, surged during QE1 and 2. They also rose leading up to QE3. The “official” inflation barometers are reinforcing this. Consumer and producer prices have both been rising in recent months, indicating inflationary pressures are gaining momentum.
At the same time, however, there’s a deflationary drag pulling on the economy. We know from your letters that this is also a big concern. This drag has resulted in slow economic growth and high unemployment.
It’s a global situation, and it’s been hanging overhead for years. It’s also the main reason why the Fed and other central banks have been flooding their economies with liquidity.
In a nutshell, they’re doing their best to offset these deflationary pressures with lots of money. What’s happening is that the Fed is creating money, which is inflationary, but other factors are not in sync.
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