Although the current consensus is pushing the idea that the market will soar once the election uncertainty is over, the post-election period may actually focus more attention to the coming fiscal crisis once politicians don’t have to worry about running for another two to four years. Peter Peterson’s best-selling book, “Running on Empty” , has given a certain amount of publicity to the idea that the dire fiscal situation needs attention, but since the solution requires some combination of spending cuts and tax increases, both Wall Street and Washington have mostly ignored the problem.
In a recent article, titled “Fiscal Ruin on the Horizon”, the well-respected political columnist, David Broder, wrote…”It’s not true that Washington can’t agree about anything. Across the political spectrum there’s a clear recognition that the present path of budget-making is unsustainable – in fact, ruinous.” The article was written in a non-partisan manner without blaming any political party or administration, and Broder does not have a history of being an alarmist with far-out policy positions.
Broder points out that the Concord Coalition, which Peterson heads, says that the federal debt will soar by an incredible $5 trillion over the next decade given realistic economic assumptions and no change in policy. The organization includes prominent Republicans, and Peterson himself, as many of you know, formerly headed Lehman Bros., and was Secretary of Commerce in the Nixon administration. Broder adds that the Economic Policy Institute, a liberal organization, sees a “budget train wreck” ahead, while the non-partisan Congressional Budget Office warns that “substantial reductions in the projected growth of spending or a sizable increase in taxes – or both – will probably be necessary” to avoid a breakdown. The current congress adjourned without passing the fiscal 2005 budget resolution, and both Stan Collender, a prominent budget expert, and Professor Phillip Joyce of George Washington University, think that the Congressional budget process may be breaking down.
Once the elections are over the White House and Congress will have to deal with the deteriorating budget situation, and the fiscal area will become an outright negative for the economy and markets, rather than the positive it has been for the last three years. Combined with the record trade deficit, the extremely low consumer savings rate, record consumer debt, and the huge decline in mortgage refinancing, any fiscal tightening can only exacerbate the economic soft spot and create strong headwinds against ongoing growth. Although the current high energy prices are another key factor in working against growth, it seems clear that even if energy prices were to fall, the economy would still be burdened with some major structural imbalances not susceptible to easy solutions. Thus the post-election period, rather than relieving the current uncertainties, may result in a renewed emphasis on the sacrifices involved in trying to solve the coming fiscal crisis that nobody wanted to face before Election Day.
