First comes gotterdammerung. Next comes phantasmagoria.
Full Democratic control in 2009 will unleash Keynesian forces not seen since the administration of LBJ. However, given the exploding supply of Treasury borrowings, the government is going to have to cut something, to raise capital.
No country in the world spends as much on defense, as the United States. Conservatively, our military spending is at minimum 36% of our annual budget. But since the wars were begun in 2003 the annual total has been running even higher. As we head into 2009 with an Obama victory likely, I think it’s obvious what’s coming for the military budget.
It will be slashed.
It just strikes me as obvious that many of the high-tech weapons and aircraft programs will be junked, despite how painful that will be for many members of Congress. That great river of spending in turn will be diverted to the domestic economy. Mostly healthcare and education, but also infrastructure.
We’ve had the gotterdammerung of a banking crisis, with an enormous recapitalization courtesy of the US Treasury. But I think it’s just the beginning of Keynesian spending, and I don’t think the markets have priced this in, just yet. Quite rightly, the actual crisis remains the current focus, as does the spectre of deflation. The persistent question now is whether governments can print enough money and flood the system quickly enough to counteract the destruction of credit and capital, wrought by the crisis. Alot of smart people say no. I say, yes.
We’re not just witnessing a Keynesian response from the US either. There is a global money-flood response underway. Some countries like Australia, sitting on surpluses, were already signalling new domestic spending last year. It’s also clear that China is getting ready to ramp domestic spending too. In the OECD, a great deal of construction in the last five years was in the private sector. I now think it’s clear the public sector is about to take the reigns. That means it’s time to fly the flag of John Maynard Keynes.
What many global investors are missing right now is the magnitude of such a tectonic shift, that is both possible and likely in the United States. Starting next year. The implications are potentially huge for all US asset classes, especially as we sit at extremes in both price, and sentiment.
-Gregor
