The big week has arrived, and opinions are all over the lot, creating unusual uncertainty.
Today it’s the mid-term elections, with Republicans expected to gain enough seats in the House and Senate to create gridlock.
That will be a good thing – or not, depending on who you listen to at any given moment.
In one camp gridlock is a good thing. If politicians can’t agree on changes and laws, they can’t make changes that would make the economy worse. They point to the 1990s when a Republican Congress and a Democratic White House spent their efforts in constant wrangling, often unable to even get annual federal budgets agreed to on time.
But the gridlock did no harm to the almost record period of economic growth of the 1990s, which ended with prior budget deficits becoming budget surpluses, powered by increased government income from taxes on the wages of full employment, strong corporate profits from the economic boom, and taxes on the profits being made in the longest, strongest bull market in history.
In the other camp are those who say the economy is in far different shape this time around, just beginning to come out of the worst recession since the 1930s, struggling with high unemployment, slow growth, a collapsed housing industry, and high consumer debt. They claim it will be dangerous to have a government unable to take quick actions that may become needed at any time. They point to periods like the early 1980s when decisive changes by government and record deficit spending were needed to recover the economy from severe downturns. And say that is what created the positive economy of the late 1980s and set up conditions for such a strong economy in the 1990s that gridlock did no harm, since further government action was not needed.
Tomorrow comes the week’s second big event, the Fed’s decision on QE2.
In one camp are those who expect a ‘shock and awe’ level of additional quantitative easing. Fed Chairman Bernanke has said the government needs to do more to re-stimulate the economy. It could well be that he is thinking that if the rest of government is going to be tied down in gridlock the Fed must act with more effort than it would like to.
In the other camp are those expecting the Fed to provide only a watered-down version of quantitative easing. They point out that recent economic reports show the economic recovery has gotten itself back on track, is not in the danger of a double-dip the Fed saw a couple of months ago, that substantial further quantitative easing is not needed, and will cause more problems than it solves (including further angering nations around the world, and creating a “currency war.”).
And even that is not the end of this week’s uncertainties. On Friday the labour Department will release its monthly jobs report for October. The monthly employment report has a history of most often coming in with a surprise in one direction or the other that creates a one or two-day triple-digit move by the Dow in one direction or the other.
The price of uncertainty is volatility. The price of unusual uncertainty is almost sure to be an unusual level of whipsawing volatility, and at a time when investor sentiment is at a high level of complacency.
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