There are noteworthy takeaways from yesterday's exercise in self-governance.
Americans now overwhelmingly view their federal government as a provider of indispensable income and benefits. Neither political party wants to convince them otherwise. Voters will not tolerate policy choices that reduce or eliminate middle class entitlements. This means policymakers will eventually opt for the invisible tax of inflation to reduce the unfunded liabilities of Social Security and Medicare.
There is little political will at the moment to reach a compromise on extending income tax cuts and cutting spending. Policymakers will not opt for sustainable long-term fiscal policy that comes at the price of a forced recession. This raises the chance of an involuntary fiscal balance forced by a bond market dislocation , i.e., Treasury can't sell enough bonds to meet funding needs.
The stock market is finally beginning to price in the seriousness of the dangers the U.S. economy faces from inaction in Washington. Further QE from the Fed will have an even shorter half-life in support of asset prices than QE3. The fiscal cliff is the end result of at least two generations' worth of flawed national decisions in favor of larger budgets, more expansive entitlement programs, and multiplying tax code loopholes.
My portfolio is structured to survive further equity market declines. I await the chance to buy amid panic selling. I am further hedged against the possibility of hyperinflation that may follow a market crash if the nation's policymakers and central bank attempt further stimulus.
This is going to be fun . . . at least for me.
