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Predictions: The Sequester

The great thing about having a blog that nobody reads is that you can make bold predictions.  If they don’t come true, nobody notices but if they do come true, you can pull them out and point to them to show how clairvoyant you are, selection bias at it’s best.  In that spirit, here is one such prediction on the upcoming sequester and its economic and political consequences.

The sequester will go through. Right now neither side is making a genuine attempt to avoid it. The President is committed to a political strategy, he thinks he can put the blame for it on Republicans. And he might be right. I think he has his sights on the midterms. It’s absolutely dishonest on several levels to go around and act like republicans are going to cut police and firemen, mainly because he is the one who has the ultimate say in what gets cut. Unfortunately, I fear that segment of the voting public who is not really paying any attention may be a majority at this point.  This makes the real question: will the President actually follow through and cut all the worst possible things and still be able to blame it on Republicans?  I don’t know, but I kind of think yes, sigh….

The real head-scratcher here is that the Republicans aren’t really shielding themselves from this.  It would be pretty simple.  All they need to do is put together a bill that cuts the same amount of spending but out of programs that hardly anyone would support, propose it and go all over TV saying they offered a better alternative to the sequester but the Democrats chose to shut down parks and fire first responders rather than cut subsidies to failing solar panel makers and $50 muffins at the triannual tropical retreat for the department of rubber baby buggy bumpers.  I can’t help but wonder if the “leaders” in the Republican party have motives other than winning more seats for Republicans in order to shrink the government and restore a greater degree of individual liberty.

But the big problem is that conservatives don’t have an adequate macroeconomic theory.  They basically think big government is bad for the economy (I agree) and therefore, shrinking it a little must be good for the economy.  The problem is that our entire economy is now built on a foundation of exponentially increasing debt expanding the money supply and driving inflation.  If these aggregates fall a little bit short of expectations, it can cause serious economic consequences.  To be clear, I think this situation is highly undesirable and it would be good to replace it with a more natural free-market economy.  But that’s not what is happening.  What’s happening is politicians have put a process in place that hacks away indiscriminately at this monstrosity in a way that insulates both sides from direct responsibility.  It’s almost as if neither side expects the results to be that great.  I think this is the case but it’s not the loss of government services that will be the problem, it will be the effect on the overall economy caused by slowing the growth of macroeconomic aggregates.

These seemingly minor cuts, along with the general determination on the part of Republicans to reign in spending, is probably not going to actually reduce deficits but it will probably prevent it from growing fast enough to support the economy.  In theory the Federal Reserve could pick up the slack by engaging in “unconventional” open market operations.  However, murmurs of reluctance to do so are beginning to emerge from those hallowed halls.  (Broken circle, Playing with matches)

So I actually think that the sequester will cause a serious economic downturn, or at least that a serious economic downturn will follow before the end of the year.  It will be the result of a lot of things but the sequester may be the thing that finally touches it off.  This will be a catastrophe for Republicans and could lead to a scenario that is so ridiculous it’s laughable.  Six years after being elected and promising to fix the economy and lower unemployment, having control of the Senate the entire time and the House for part of that time, we may go into the midterm elections with double digit unemployment, negative growth, and a depressed stock market and still blame Republicans for it.  If Democrats get control of both houses of congress and a 60 vote majority in the senate under those circumstances, God help us.


P.S. Did I mention that George Soros sold gold last quarter?  Here’s a piece from the WSJ a few days ago.

Perhaps even more worrisome, Shaoul points out, is mom-and-pop investors aren’t shedding their gold holdings in the same fashion that the “smart money” has. Total global ETF holdings in gold rose at the end of 2012, growing by a total of 3.4%, he says.

“This indicates that there were other, dare we say less sophisticated, buyers of the metal,” Shaoul says. “The transfer of an asset class from stronger to weaker hands is a process known as ‘distribution’ and is normally followed by a sharp move downwards as the new holders discover they have rather less company than they assumed at the time of purchase.

“The unusually broad public dumping of the metal by a number of respected fund managers does therefore create a risk that sentiment towards the metal could start to deteriorate rapidly in the coming sessions,” he adds.

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  1. steve618
    February 24, 2013 at 5:58 am

    Your prediction is duly noted. Glad to see you’re not on the gold bandwagon where ‘everyone’ knows hyprinflation is inevitable and gold can only head higher. Insiders are selling stocks as well.
    I think the political fallout of the economic downturn you’re forecasting will impact both parties. Any incumbent perceived as being part of the problem will be an easy target.

  2. Free Radical
    February 24, 2013 at 7:42 pm

    I’ve been pooh poohing gold for a while now, trying to explain that the rise in gold prices is because of low inflation expectations, not an easy task. Hopefully we will vote them all out and start from scratch but I don’t know, that’s not what my gut tells me is coming.

  3. Anonymous
    February 26, 2013 at 12:11 am

    90%+ of incumbents were re-elected in 2012 to Congress. Something tells thats not going to change any time soon.

  4. Free Radical
    February 26, 2013 at 3:50 am


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