As the clock ticks down once again on another fiscal deadline, it would appear that the US and global economy are in for a brief bout with a familiar friend, uncertainty. In the face of uncertainty, it is important to review one’s basic premises to be assured that they still hold.
Most days, it hardly seems worth doing. The data we track tends to stay in a fairly tight range. However, were one to view the same data points say, three months ago, there may be a noticeable difference in the data points which would reveal something. That something, for the past two years, has been that come what may, be it TARP, debt ceiling votes, Euro zone crises, Fiscal cliffs, or the latest version, the Sequester, the data points have consistently returned one answer as to what lies beyond the speed bump: Inflation.
However, the drama that unfolds in the lead up to what can only be described as a failure of governance sends jitters through the most vulnerable parts of the financial markets, which circa 2013 encompass literally all financial assets. These jitters are caused by a Pavlovian reflex that the markets have ingrained in their psyche at any hint of the Fed’s Permanent Open Market Operations (POMO) running dry.
The POMO, for the initiated, is where the magic of Quantitative Easing and other monetary alchemy takes place. It is where the Federal Reserve exchanges wine for sewage, and it is increasingly difficult to say who is providing what. In the end, it will all turn to sewage, and the end is always nigh, hence the Pavlovian response.
So it is with government finances when the monetary premium is removed from goods in the natural realm. The above mentioned TARP, Debt ceiling votes, Euro zone crises, Fiscal Cliffs have proved to be nothing more than meat hanging on an electrified wire for the governments of the west. It may shock them, but it will do little to change their behavior. The latest version, known as the Sequester, which is essentially the spawn of the August 2010 debt ceiling debacle, is simply more meat on the proverbial wire. A vain attempt to feign control over something that is inherently uncontrollable.
As the threat of the Sequester looms, traders will yelp and make a dramatic retreat from the markets, yet as it passes, they will return to the leveraged speculation that the Federal Reserve has championed. The traders will continue to roam farther and farther afield until they cannot go any farther, a moment which will come when the Federal Reserve is the only customer for US Treasury debt, and the incestuous feedback loop between the stewards of the money supply and issuers of government debt and spending collapses upon itself.
At that point, analysis will be useless, as the entire system upon which present analytical tools base their assumptions will cease to exist.
While the Sequester is important for doctors and those who make armaments for a living, many of whom live very close to Washington DC, making for a vocal and visible constituency that will be impacted, it is ultimately meaningless, both in terms of reigning in government spending or slowing down, let alone stopping, the tidal waves of inflation that are breaking just offshore.
The threatened Sequester, taken along with Bernanke’s QE apologetics in Congress today, may prove to be deflation’s last gasp. While the threat of deflation may cause a temporary pavlovian response in the markets, in the end it is an empty threat, as both traders and members of the general public are increasingly aware.
The only thing left to do, then, is to grab a silver surfboard and ride the wave.