Destructive Deficit Spending

You know that when analysts and economists who have always tried to stay away from expressing their political viewpoints start commenting about how change needs to take place or the long-term economy will not be good.

Here is the commentary of one of my favorite CFAs regarding the deficits:

"In our analysis of the current market environment, we believe that the massive budget deficit has place the Fed in a "no win" situation, in which every path it takes leads to higher interest rates and associated with economic problems. Importantly we have only explored the consequences of the Fed simply stopping the printing presses; the Fed will encounter even more unpleasant choices when the time comes to reverse course, sell assets and drain the excess liquidity from the U.S. financial system. If we have not made progress on putting our fiscal house in order before than point, then the upward pressure on interest rates could become overwhelming.

"This does not mean that the U.S. is doomed to experience persistently high interest rate environment of the 1970s and early 1980s. The ultimate long-term solution to these problems, in our view, is for the 2010 mid-term elections to revolve around an intelligent, credible debate about the future course of government spending, taxation and debt levels. The American people could provide the next Congress with a clear mandate to restructure government priorities so as to be less dependent upon deficit financing. A credible deficit reduction plan would take tremendous pressure off the Fed and give it much more flexibility in crafting a monetary policy that boosts current economic growth while keeping long-term inflationary expecations low.

"Cynics who do not believe that Cogressional elections can affect such dramatic changes should remember the 1994 election, when Congress was granted a clear mandate to shift budget priorities and reduce the deficit. The fiscal changes negotiated between Congress and President Clinton after that election ultimately resulted in budget surpluses within a few years. Unfortunately for bond market bulls, this mandate for change was in part spurred by the painfully high mortgage rates experienced by American voter during 1994. The bond market vigilantes may have to return before budgetary change comes to Washington." - Rod Smyth of Riverfront Investment Group.

Yet another reason why I feel we should all push hard to get new people into Congress. No more of the current entrenched representatives.