Jim Hoft has an excellent summary (watch the interview with Representative Mark Kirk (R-IL) of the current challenges faced by the Fed and the Treasury as both institutions navigate the high wire of financing the almost two trillion that must be raised to pay for Democrat’s government spending programs. The Chinese are clearly concerned about inflation and have taken steps to hedge against that risk by establishing a second strategic petroleum reserve and acquiring an amount of gold equal to two Fort Knox’s.
While I’m still undecided about the efficacy of gold as a hedge against future inflation from current levels, I have no doubt about the Chinese strategy with other commodities such as oil, which is creeping above $70 dollars a barrel. The Chinese are in a difficult situation right now on the matter of their US debt holdings. They can’t sell those holdings (too large) without precipitating a panic in global credit markets. They are also very aware that the US may try to devalue their US Treasury holdings by inflating the US economy (witness the derision directed toward Secretary Geithner on his trip to China).
The US will need to sell approximately $2,000,000,000,000 (trillion) in notes and bonds before the 2010 elections to fund current spending and budget needs. I can’t imagine an economic scenario where this borrowing can be done without a commensurate increase in interest rates, energy prices and food prices. And there’s the Catch 22. How will the economy recover and grow if consumers and business are paying more for money, more for energy and more for staples such as food? Does anyone believe that housing can recover in a rising interest rate environment? Is small business (historically the engine behind employment growth) going to expand in the face of rising energy and interest rates? Of course not.
I spoke recently with a consultant that advises small businesses (FYI: small business is a company with sales between $10 – $100 million) on financial forecasting and financing. He told me none of his clients have plans to increase employment this year (in fact, they are continuing to lay off employees). I have always been an optimist about the future but never before have I seen such a dismal array of fundamental economic and business data. If the US economy is to avoid a protracted period of high inflation, low growth and high unemployment policy changes must be enacted now. That can begin with a halt in any new spending programs and a roll back of the terribly ineffective Stimulus legislation. The challenge is centered on whether Democrats actually care what they are doing to this country. Or does their thirst for political power so blind them to economic reality that they will take the country off the cliff with them?