Reverse US Economic Woes By Raising Interest Rates?

Well, it seems like everyone and his broker seems to have this economy pegged and knows exactly what is going to happen. The Fed is going to continue to print money, keep rates low, the dollar will continue to tank, stocks and commodities will continue to rise and somehow they will keep inflation in check. Sound about right?

On Monday, what was previously the unthinkable happened; GM (GM) was allowed to go into bankruptcy. And the Dow responded by being up 220 points. The market was sending a clear message to the Obama Administration- that not only does capitalism work, but also that perhaps the economy is resilient enough to handle other “truths”.

Like the one about the US being completely broke. Or the one about how the Chinese won’t lend us another dollar without being compensated for the additional risk they are taking on, regardless of whether or not the US gets downgraded.

While the President made a great show of his big “date night” in NYC on the tax-payers dime, Secretary Geithner was quietly in China trying to allay the fears of our largest creditor.   Any guesses as to what took place at this meeting?

So everyone thinks that the administration’s plan is to inflate our way out of our deficits. Geithner himself assured the Chinese that we would cut our deficits. I wonder if they asked him how the US government intended to do that without the ability to tax itself? Are there any private sector investors left that will get into bed with these guys? Who is going to be left to tax? And clearly they have no intention of cutting spending.

Enter the bond vigilantes. Yields are rising fast as creditors are starting to question the Obama plan to spend our way out of this recession. I suppose that plan could work if you actually had the cash to do so, but to print money recklessly while handing out IOUs is downright laughable. It’s like borrowing money and then going to the casino!

So how is this dangerous game of economic chicken going to come to an end?   Well the one thing we have learned about this administration is that they will ALWAYS do what is most popular.   How popular are they going to seem when we have $4.00 gasoline?

And it’s going to look doubly bad as hedge funds and investors make big bucks on rising stock and commodity prices while the little guy gets hosed again. Where’s the change in that?

The biggest economic problems under George W. Bush were:

A housing market on steroids that encouraged unqualified buyers to become homeowners.

Ridiculously low interest rates for far too long which weakened the US dollar.

Gross inflation- not the kind that gets reported by the government, but the kind you seen when you pull up to the tank and see $4.00/gallon or hit the grocery store for $5.00 milk.

Large budget deficits.

Now, for the administration of the guy who ran on the platform, “I am not George Bush”, guess what? If it looks like a duck and quacks like a duck….

Let’s face it, everyone has figured out the correlation trade and oil is around $68/barrel already without the effects of the stimulus program having even been realized yet!!

So how should this administration differentiate itself from the prior regime that they have so tactfully blamed for all of our economic woes? With the one action that can reverse these problems even though it may be a bit “painful”.

By raising interest rates! Commodities will sell-off, money will flow back to the dollar, and our creditors will be more likely to lend more now that they are being compensated for taking additional risk.

Who gets hurt in this scenario? Responsible home-owners and the Chinese. But they didn’t vote for Obama anyway.

This could happen sooner than you think.