Tuesday, November 20, 2007


It is not clear if Bernanke and company will cut rates in December. If they don't the next rate cut could come in Euro land. Money is extremely tight in Europe. The rate on short money is only 4% but Americans need to trade $1.48 per Euro before they can invest in the country. BCA Research uses a combined index of the Euro and the exchange rate to show that the Euroland economy is suffering from tight money. A slow down in Europe will slow demand and thus move the world down the price curve for goods. The world is connected like never before. Slower growth in Europe will spread to trading partners and lower interest rates will be needed to spur economic growth.

The US congress got out of town without doing anything. It must come back after Thanksgiving to set the budget for the fiscal year that started October 1. The leadership will try once again to pass left leaning laws, many of which would be harmful to the many in order to help the few. Unless "a grand compromise is reached", the congress will be one of the biggest "do nothings" of all time.

The markets should react well when it is clear that a good compromise has been reached or when it is clear that not much will be changed. I see no way for the congress to leave town again without striking down the annual automatic increases of Alternative Minimum Tax. Getting out from under this law should provide a relief rally.


Although it cannot only be said in a round about way, the executive branch of the government can influence the timing of central bank cuts. The politicians feet are being held to the fire by high oil prices and high interest rates. Euro land bankers must hold onto high rates for extra time because when the dollar turns up, the cost of oil to Euro land will automatically go up. So far, Americans have felt the brunt of high oil prices. Once the dollar starts to rise, the price of oil in Euro terms will tend to rise.


In the past year, there have been over 11,000 earmarks inserted into bills. The total of this "extra spending", if they were all to pass, would be over 300 Billion Dollars. The American people have been fooled into accepting high tax rates. The good news is that there are signs that "special projects" are going to be cut back hard. This congress receives one of the lowest favorability ratings ever. Bush is certainly not the most popular president of all time. He spent a lot of money giving drugs to seniors and paying schools to focus on struggling students. Whenever politicians spend tax dollars to do what the private market could do better, the waste eventually becomes apparent. Today, the most liberal of politicians will tell you that the "No Child Left Behind Program" has produced less than satisfactory results relative to the money spent. Hopefully, the next program will allow individual choice (free markets) to correct the "factory floor approach" to education.

The US is going to struggle to keep up with the rest of the world if we don't start using our resources more wisely. The failure of this congress to pass bills, such as the farm bill loaded with special interest payments, is a great sign that the turn is here.