Into the Wilderness

I had a number of heated conversations around my analysis of the Deficit Reduction Deal just signed in to law by Mr Obama. The gist of the arguments ranged from "what did you expect there weren't really any alternatives given the intransigence of the right" to "don't worry, Obama will get reelected in 2012 and then he will get down to business".

I am quite concerned by the whole range of the counter-arguments. I know that politics is the art of the possible and by definition that means compromise. But compromise means a move to the middle. I saw this as a lurch to the right.

Of course there are extremists on both sides of the aisle, but there is no question that the rise of the right within an already right leaning Republican party completely overshadows the supposed extremism of the Democratic left.

We need to keep this in context. Left or right, they are all capitalists. The question is merely one of unfettered versus regulated, and more importantly, the invisible hand of the markets versus the visable hand of a social conscience.

What makes America great is the opportunity open to all to get ahead. And what is crushing that opportunity is the use of base populism on an ignorant electorate manifesting itself as the Tea Party who are puppets dancing on the strings of crony capitalism-American style.

Look at the response to the deficit compromise. Stock markets retreat, spreads widen and the safe-haven trade marches relentlessly on. Cash, Treasuries and Gold continue to be the investments of choice and in the stock markets even the defensive stocks of Health Care and Defense are slaughtered on the altar of uncertainty.

The great American consumer in the form of individual equity investors is running for the hills. Hedge funds, the majority of which sold alpha and delivered beta are 75% in cash and still charging 2 and 20.

Instead all eyes are on China and how it will react in the event that the US is downgraded-which is still a strong possibility. The spending cuts voted in without any tax increases to help balance things leaves the government's hands tied as far as any stimulus spending is concerned to help stimulate employment.

We have the uncertainty of when, and frankly, what the rating agencies will do. In all likelihood they will wait and see. Wait and see who gets on the Committee of Twelve. Wait and see if more compromises are possible or if there will be six Republicans continuing their mantra of "No" and if the six Democrats suddenly find some steel in their spines only to realise that it is too late and that their line of defense has already been breached and the only thing left is to also say no leaving us with a government without the ability to govern.

Now I am not a student of the Great Depression but I know it lasted over a decade with many false dawns. I also know that what got the US out of it was the Second World War.

A "relatively" unified nation was able to put aside many of their differences and focus on the more pressing challenges of a world war. I don't think however that we need to wait for a military war to get our act together. We are in the midst of an economic war of epic dimensions.

This compromise was supposed to deliver stability. It was supposed to take the uncertainty out of investing, our of consuming-out of our everyday lives. It smells much more like hope, that false comforter in times of need. If American capitalism is to survive, rational compromises are going to have to be made. If not, we just might be on the edge of a great wilderness.