Obama has Zero Degrees of Freedom

Lately the subject of the economy has been weighing heavily on my mind. It seems to me that the entire house of cards is tumbling down as a result of mortgage banking crisis.
T-Bills went negative last week. That is, investors were paying the U.S. Federal government to warehouse their money in T-bills for an allotted time. This is the logical equivalent of renting a safety deposit box in a bank to store you money in. Why would ultra-rich and ultra-savvy investors ever do such a thing? There is only one answer: It is a vote of no confidence in the banks. Rich men do not trust banks with deposits larger than $250,000 because such deposits are not ensured and they fear the banks may be going out of business. They view Federal T-Bills as guaranteed and secure. This is the only logical explanation.
The logical implications are dire, and they should make your blood run cold. The Implication is that the ultra-rich still expect more banks to fold, and large fortunes stored there-in to be lost. They must not know who is solvent and who is not. Ergo they trust no one. This also implies corollaries about our level of transparency and accountability in finance. This should also make your blood run cold.
Now we hear tell of a simple Ponzi scheme run by--the former head of NASDAQ, and a member of the SEC--Bernard Madoff. This scheme bagged such famous names as HSBC, RBS, and Groupo Santander. $50 more billion has been lost, charities have closed, personal fortunes have been destroyed, but worse still is the level of distrust this has created in the money market at a time when we can ill afford more distrust. Worse still is the fact that many of Bernard Madoff's big customers, like Groupo Santander, knew his transactions could not net the level of profitability he reported. They guestimated that he was engaged in another form of illegal insider trading called 'Front Running', and they fully accepted him on that basis because they believed they were making money.
The prime is at 1% and the Fed is ready to cut that rate in half. That doesn't give them much room left for cuts. Many astute observes have asked what the Fed will do if this latest half-point cut does not work. The answer is: Monetary Easing. This is the last tool left in the box. It is the nuclear option.
What is Monetary Easing? It means the Treasury is going to print a ton of money, and flood us up to our waists in dollar bills. In three years time this will produce double-digit inflation, but in the short run it might unfreeze the credit system. Underscore the word 'might'. This action will prove that Keynes was right: In the long run we are all dead.
The problem is that {lately} the value of the dollar has been crumbling. The dollar surged, strangely enough, in the month of September as the banking crisis broke out. The Dollar made a big move against the Euro, going from 1.54 to 1.25. It improved against 15 major world currencies, as well as commodities like Gold and Oil. Now, in the past week or so, the Dollar is pulling back. Already the Euro has recovered to nearly 1.37. After reaching $40 per barrel, oil has risen as high as $47 and currently sits at $44.68.
If the Fed and Treasury chose to pursue a policy of Monetary Easing, the Dollar will crumble.
Which brings us to the biggest problem of all: What happens if our fiat money system collapses? As you know, our Dollar bill is backed by nothing more than the full faith and credit of the U.S. Federal government. Nothing more. How real is that? Real enough that investors would prefer to warehouse their dollars with the Fed rather than a bank. But how long with this condition persist?
This brings us to the biggest issue, and the subject of this post: Barak Obama has zero degrees of freedom in his upcoming presidency. As I have written before, HSBC predicts the current recession will last 5 years until September of 2013. This is provided the world doesn't end in 2012 as the Mayan calendar predicts.
If we have four lousy years of recession between 2008 and 2012, Barak will get fired. The people are irrational. They believe the president is the commander & chief of the economy. This is absolute bullshit, of course, but the people believe it. When the economy turns bad, they fire the president. Just ask George Bush I. He 93% approval rating at the end of Gulf-War I. He got fired a year or so later when it became clear we were in an Oil-Shock recession. This is the fickleness of the American People, of whom I am one.
If Barak wants to get re-elected, he has to find a way to restore growth, and make it clearly visible before 2012. Otherwise, he will be a one termer. When you are in this sort of a mess, how do you get out of it in 4 short years? The answer is that you do the very best and most complex linear programming you can and you pick every last optimal solution point. You try to bull’s-eye each one of those optimal solutions with pinpoint policies. In this scenario, you cannot afford to custom tailor a bill for even your best supporters. You must pick the optimal choice and not vary from it.
The logical implication is that those on the Left expecting highly-favorable and high-priced legislation are doomed to be disappointed by Barak Obama.