Obama to suffer same fate as Carter?

Look to 1980s election for what might happen this year.  A snippet

Jimmy Carter's Economy 

Policy in an Age of Limits 

by W. Carl Biven

Woodward describes Alan Blinder, soon to be a member of Clinton's Council of Economic Advisers and later to be appointed to membership on the Federal Reserve Board, as telling the soon-to-be president that with a cooperative Federal Reserve and bond market, deficit reduction could be relatively cost-less in terms of the effect on economic activity. "'But after ten years of fiscal shenanigans,' Blinder quickly pointed out . . . 'the bond market will not likely respond.' At the President-elect's end of the table, Clinton's face turned red with anger and disbelief. 'You mean to tell me that the success of the program and my reelection hinges on the Federal Reserve and a bunch of . . . bond traders?'"[32] Woodward reports that from around the table there was not a dissent. James Carville, chief strategist for the Clinton campaign, was later quoted by Woodward as saying: "I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody."[33]

Financial markets are relentless. They can be impulsive and shallow in the short term in their reaction to news from Washington. They also have a bias against a booming economy. The ideal state of business for a bond holder is an expansion timid enough to dampen inflation and prevent rising interest rates, and falling bond values, but not so weak as to trigger default on debt contracts. But over the longer pull, it should also be said, financial markets may be more objective in judging presidential economic policy performance than other outside critics.

The sharp increase in rates following the announcement by the Carter administration in early 1980 that the deficit in the budget would be higher than the earlier forecast was due to a mix of Wall Street concerns. The larger deficit would require financing and force the Treasury to go to the market in competition for funds. It was also viewed as adding to inflationary pressure. In any event, the chaos in financial markets left the impression of an administration out of control.

So what can we take away from this little snippet?  Do we reduce the deficit in the face of yet another liquidity crisis and risk further deleveraging and defaults... in an election year?  NO!  

Here and Here

Rather, it seems very clear to me that the administration will do everything in its power to put lipstick on the pig that is our economy.  We've had a budget deficit for several years running, that doesn't seem to scare people as much as the prospects of losing their jobs, entitlements and value on their leveraged assets (homes).  

Does the administration move to raise the deficit ceiling now or do we cross that bridge when we get there?  I would think the administration wants to get this out of the way now as opposed to waiting until deep into the elections to raise the budget deficit.

In any case, the market is signaling that liquidity is needed NOW.  So let's assume for a moment that the deficit ceiling will need to be raised... logically, well ahead of the elections so that it doesn't pop up when it matters the most.  The Treasury Dept will need a market for their bonds and the Chinese (2nd largest buyers after the Fed) aren't buying.

Here

So who makes the market?  The FED of course!  They're already buyers of 60% of net treasury issuances... which in turn means the FED will need to print more money!  If not for the FED buying up the majority of new issuances, the interest rates would need to rise... which is an impossibility at this point.  As Kyle Bass would say, "The Keynesian end point is Zero"... interest rates can not go up simply for the fact that the already ballooning deficit would go parabolic [moreso].

This market has proven time and again over the past 3 years that it CAN NOT grow absent intervention.  Fed intervention has been the impetus for every rally and meltdown in the past 3 years.  Can we risk another meltdown when Operation Twist ends in June?  Don't think so... certainly not in an election year.

And make no mistake... the GOP will find a way to make this work for their agenda.  INFLATION! They'll cry.  They'll point to rising gas prices, food, whatever.  Anything to spook the public and discredit the current administration.  And as we know, managing THE PERCEPTION of inflation is half the battle.  Inflation isn't simply the growth of money supply... it is the velocity of money and the velocity at which money moves is a function of psychology and the expectation of future inflation.