Now that the Democrats have likely taken control of both houses of Congress, some on Wall Street are cheering the return of government “gridlock.” The idea is that in a divided government each party stymies the other, resulting in no new legislation and no need to reformulate business plans. Companies and investors feel more comfortable with the devil they know. As legislation often does more harm then good, gridlock can be seen as being friendly to business and good for the economy.
However, my fear is that we actually get something far worse: bi-partisan cooperation. The most likely result of both parties "working together" is Democratic support of Republican pork, in exchange for Republican support of Democratic pork, which will wreak further havoc on the country's already dismal balance sheet. In addition, grandiose and ill conceived pet programs on both sides have much better chances of actually being passed. The last thing we need is Democrats and Republicans actually working together.
By 2008 the country will likely be in a deep recession squarely blamed on the Bush administration. This will set the stage for the Democrats to recapture the White House with a strong mandate for change and a supportive legislature. If the "free market" and "laissez-faire" rhetoric of Republicans are discredited, then the big government Democrats could be perceived as the solution. If so, look for a potential President Hillary Clinton and Speaker Nancy Pelosi to summon the ghost of FDR and conjure up another New Deal. Such fiscal activism, especially coming at a time when our nation can ill afford it, will cause the recession to be a whole lot deeper and last a whole lot longer than might otherwise have been the case.
The main problem however, is that the real economic damage has already been done, under Clinton with the technology/internet bubble and under Bush with the housing/consumption bubble. As a result, our highly indebted, de-industrialized economy teeters on the brink of collapse, with nothing but the perceived political expediency of foreign central bankers temporarily propping it up.
The fact that so many on Wall Street are oblivious to the political storm brewing on the horizon is yet another example of the head-in-the-sand complacency that rules the day. However, based on the seemingly benign current economic statistics, the Republicans should have done much better. Rather than merely attributing the poor showing to Iraq or to personal scandals, perhaps it is evidence that the economy really isn't as good as these phony statistics purport it to be. Of course, it wouldn't actually dawn on anyone on Wall Street to actually connect these dots.
At least precious metals traders seem to be getting the picture. Gold's sharp rally today following the news that the Democrats regained control of the Senate shows that the inflationary implications of rampant government spending are not lost on everyone. The correction is clearly over, the lows are in, and a new high in gold is likely sooner than just about anyone thinks.
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