Thursday, May 28, 2009

Shooting for Two Predictions

Prediction 1 – Bond market will force Obama Administration and American Congress to limit the deficit; or at least come aggressively on that. If Obama Administration is wise, which it is, they would be planning right now major response to impeding market event when bonds create the havoc by demanding higher yield. Bond market is not going to keep quiet unless there are some major commitments from American politicians. That is going to happen.

What can White House and Congress commit? Increase in taxes and decrease in budgetary expenditure? Well, there is no other way than that to control the runaway deficit. Granted, market is placing the premium on ‘ignition of recovery’ rather than deficit. But the nascent recovery very soon will be jeopardized unless savagely hungry bond market is feed. That is where potentially it will bite to White House that all those $700+ Billion dollars in stimulus package were not planned well. We are in the ‘show me my money’ mode and economy is not getting as much traction as what Obama Administration had sold. So people are upset that the entire stimulus package is resulting in increasing deficit precipitously without bringing in commensurate recovery.

Prediction 2 – Eventually Americans will get a right response for this challenge of bond market partially making some serious headway in terms of managing deficit. Congress will be forced to ‘get the message’. Surprise will be - Fed Chief Ben Bernanke will get this credit of ‘taming treasury borrowing’ and he will be the ‘Time person of the year’. Though David Ignatius in WaPo talks about possible replacement of Bernanke by Obama Administration once his term is complete by year end, White House will do well to reappoint Bernanke. Any other nominees, including Larry Summers, will be a surprise and it will not happen. Bernanke will server one more term or at least get extension of few more years. America will do good with that.

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