Plus Ça Change (Plus C’est La Même Chose)

This past week provided an excellent example of this old French saying, which translates somewhat inelegantly into English as: “The more things change, the more they stay the same.” The US mid-term elections may have resulted, as expected, in a large victory for the Republicans, who now control the House of Representatives. But notwithstanding some grand headlines in the press, this is highly unlikely to change current US or global economic and financial market trends.

For the Republican Party, it’s celebration time. They have just seized a sizeable majority in the House of Representatives and narrowed their minority in the Senate. For those not well-versed in the way the US government works, the result is a recipe for complete, utter political gridlock. Congress is now divided. And with polls showing President Obama hugely unpopular with the electorate, even the Democrats in Congress are going to find it difficult to cooperate with the Executive Branch during the coming two years, of which the second is that of the next election campaign.

Now what’s wrong with gridlock? Some observers have pointed out that, once President Clinton lost control of Congress in 1994, he abandoned a few ambitious but politically unworkable initiatives and started to do a respectable job. After all, the authors of the US Constitution and the Federalist Papers advocating its ratification didn’t emphasize the checks and balances of the federal government for nothing: By design, the federal government should check itself. To paraphrase Gordon Gekko, “Gridlock, for lack of a better word, is good. Gridlock works.”

Or does it? Certainly if something is not broken, one shouldn’t go around trying to fix it. For those who have faith in free markets, the last thing you want is for the government to pro-actively find ways to help businesses and consumers. If gridlock keeps the government in its box, great. But what if the government is already out? What if US markets are not free but rather highly regulated, taxed, subsidized and otherwise distorted, such that resources are chronically misallocated? What if, following years of artificial monetary and fiscal stimulus, these misallocations are now so vast, they critically undermine the economy’s ability to grow out of the huge mess it is now in and service the massive debt that has been accumulated at the federal, state, local and household levels?

In the current instance, gridlock, it would seem, makes it all the more likely that the government is going to go right on doing more or less as it has done during the past few years. This is made all the simpler by the fact that the vast bulk of the US federal budget is non-discretionary. Yes, that’s right. All the time and money spent lobbying and lawmaking in Washington may keep the local economy booming and fill the newspapers will all manner of suspenseful headlines but, in reality, it is increasingly irrelevant with respect to the overwhelming portion of the federal budget, which grows automatically and is no longer just chronically in deficit, but amidst weak economic growth, exponentially so.

So for all those out there who believe that somehow gridlock is good, think again. The US is on the path to economic ruin. And those folks in Washington supposedly in charge of things are now going to spend the next two years debating, disagreeing and campaigning for 2012: Après nous, le déluge.

Regards,

John Butler,
for The Daily Reckoning

[Editor’s Note: The above essay is excerpted from The Amphora Report, which is dedicated to providing the defensive investor with practical ideas for protecting wealth and maintaining liquidity in a world in which currencies are no longer reliable stores of value.]