Now that the initial euphoria of the Obama election victory is over, it is time to get back to reality. No doubt, although Obama’s victory is very meaningful for the aspirations and dreams of millions of African-Americans, the truth is that nothing has changed fundamentally. America’s economy (and by extension, the global economy), is still in a mess. On the geo-political and foreign policy front, there are still a lot left to be desired. Although we admire Obama for his victory against all odds, we would not like to be in his shoes because the tasks ahead is colossal. After 2 terms of mismanagement under the previous administration, we doubt Obama could undo all the damages very quickly.
As investors, we will leave the politics aside and look at what the implications of an Obama Administration for investors:
Political ideology
We are not well versed in American politics here, so please correct us if we are wrong. The Republican Party is often ideologically associated (whether rightly or wrongly, it doesn’t matter) with smaller governments and free markets. The Democrats are perceived to be leaning more towards socialism ideologically.
We vaguely remembered George Bush said something like this regarding his initial thoughts on the $700 billion bailout plan,
My first reaction is to let the market be free, but on second thoughts…
We cynically believe that this talk was probably scripted. What does this mean for investors? At the very least, we expect more government interventions and bolder economic ‘stimulus.’
Mandate
While many political analysts may not describe the Obama’s victory as a landslide, it is very clear that he has the mandate of the American people to change America. Now, we have:
- A very charismatic Democrat president, …
- … whose race is rallying point for the unity of the American people,…
- … who has the mandate of the people and…
- … whose party controls both houses of Congress.
These three factors imply a greater concentration of power for the US government than before. Compared to the previous administration, we believe that government interventions will be bolder and will be done quicker and more decisively.
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Is this a good thing? If you belong to the libertarian camp, then this is bad news. As we said before in A painful cleansing or pain avoidance at all cost?,
Even if Ben Bernanke is an Austrian economist, political pressure alone will do the job of forcing him to act otherwise. This is the Achilles? heel of democracy. The mob will scream at the Fed to bail them out by ?printing? money. Should the Fed refuse to comply, we can imagine the mob storming the Federal Reserve to demand the head of Ben Bernanke. Therefore, the Fed will have no choice but to acquiesce to the desire of the mob, whose aim is to avoid immediate pain as much as possible.
The American people have spoken and got what they want.
On the other hand, if Obama can use his charisma, mandate and authority to sell the message that America’s economic woes require tough medicine, then this is a good thing. But if not, it will be as we we warned in Recipe for hyperinflation,
There is no way any politician can sell the message that America needs a severe recession (or even a depression) to cleanse the economy from the gross excesses, imbalances, blunders and mal-investments. Thus, it is very likely that they will have to fight deflation till the very bitter end, till the last drop of blood from their last soldier. Since the current structure of ?rules? will be too restrictive in such a war against deflation, there will be popular momentum towards the bending and rolling back of these ?rules.? If they press on relentlessly till the final end, there can only be one outcome: the US dollar will be joining the long list of failed fiat paper money in the annals of human civilisation.
This is not to say that if hyper-inflation ever happen, it will arrive soon. Such development can take many years to unravel.
