Implication of an Obama win?

Tuesday, November 04, 2008 | posted by RedApple
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Democrats, and Obama is no different, like to spend. It has been traditionally true that Government needs to spend during recession (and depression) to push the economy out of the slump since private companies tend to pull back in investment and employment due to lower economic visibility and more difficult credit condition. While it is a good news that Government spending will help the US economy, we need to consider the economic backdrop of the present condition: 1. over 1 trillion dollars of bailout, 2. budget deficit, 3. fiscal deficit... Basically, our country is most debted ever in history while our ability to repay these debts looks ever so bleak. Even though US economy needs further Government spending, can we afford to spend more?

The implication is clear: 1. higher corporate taxes, 2. higher income taxes, 3. pressure on US Dollar, 4. pressure on US credit rating, 5. ultimate inflation in 2-3 years (both 4 and 5 leads to higher long term interest rates)

All in all, combined with the already large bailout package and our extreme debt borrowing, Government will still need to spend more to help to recover the economy.

Can the creditors to the US keep lending without questioning the creditability to repay the debt? We have seen the examples of "bank runs". Since bank only holds a fraction of its deposit, a run in the bank will bankrupt the bank unless FDIC comes in. But who is the FDIC of USA, IMF?

How long can we keep playing with monopoly money? How long will we play the musical chair of sovereign lending? I think that in the end, it is only responsible to have a Gold standard here in US and other countries. It will take the fear away from all sovereign lenders. In the shorter term, I expect that sovereign lenders will demand higher interest rates to lower the "leverage" of the borrowing countries. Hence TBT (UltraShort Lehman 20+ Year Treasury ETF)remains a good investment bet.