in Second Half of 2009
January 20, 2009
Putting Bernie Madoff in jail might also ease investor discontent, he added.
Valliere also acknowledged the downside of the monetary and fiscal policies that are giving him hope. He expects deflation to be an issue for the rest of 2009, but “we have a long way to go before we have to worry about inflation,” he said. He expects inflation to become an issue in mid-2010, but he believes Bernanke can “slam on the brakes” to arrest runaway inflation.
Budget deficits are now projected to be 8% to 8.5% of GDP, topping the previous post-War high of 6% in 1982-1983. But Valliere says this will not drive up interest rates because they have shown “no correlation in the past” to the deficit. These deficits will, however, preclude the federal government from dealing with some of its big long term problems, like Social Security reform, he said.
A weaker dollar will be another consequence of these policies, Valliere said. But in previous periods of high deficits (like 1982-3), interest rates actually bottomed, he noted.
The final downside consequence to government policies over the last year has been “the total rewriting of the concept of moral hazard,” Valliere said. “We are now in a climate where no one can fail.” He expects another “chunk of money” to be handed out to GM, he added.
On the political side, Valliere noted Obama’s facility for moving to the center, but he also questioned the sincerity of such moves. “I am not naïve enough to think this will be a centrist government,” he said.
Valliere offered four predictions in the political arena. Really ambitious programs, like universal national health care, will be tabled, replaced instead by more modest initiatives similar to the existing s-chip program, the federal government’s health coverage program for low-income children. NAFTA will not be rewritten, and no significant steps will be taken to undo free trade. Secret ballots for labor unions, which have become a highly sensitive issue for some Democrats, will not be outlawed. Lastly, he said, “by far the biggest step” will be with taxes. Higher taxes for the “rich” will come “much later” in Obama’s presidency, probably at the end of 2010.
The weak economy has necessitated Obama’s centrist moves. But, Valliere said, Obama is also keenly aware of cases where previous Democratic presidents overplayed their hand and suffered a loss of popularity. Clinton saw his ratings decline when he pushed for national healthcare, and Carter, who had 61 Democratic senators when he took office, “squandered his mandate” in a similar fashion.
The big wildcard in Valliere’s analysis is on the geopolitical front, especially with regard to Iran. Valliere expects it will not agree to limit its nuclear arms programs, and Israel will not “wait forever,” despite the recent report that the US had refused to sell Israel bunker-busting bombs and to grant fly-over privileges for its pilots to cross Iraqi air space in order to bomb Iranian nuclear sites.
“I worry that, longer term, the great threat is the Iranians,” he said.
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