Going Long Printing Presses and Taxes

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Includes: DIA, QQQ, SPY, UDN, UUP
by: Keith Robison

Bernanke & Co. are going to make sure that the U.S. does not become the next Japan, a country that was plagued by deflation for years.  If there is one thing we can count on, it's that our government will do everything possible to reflate our economy, from cutting taxes to lowering interest rates, buying assets, and even buying companies, which in the long run will result in higher taxes for everyone, an increase in the money supply and higher inflation.

Ben Bernanke is an expert on the Great Depression and he also has a great understanding of the financial crisis that occurred in Japan.  His nickname, Helicopter Ben, was given to him after a speech in 2002 regarding deflation, where he mentioned a statement made by Milton Friedman about using a "helicopter drop” of money into the economy to fight deflation.  He has made it clear that he believes deflation can be prevented when the government controls the money since the government can simply issue more money.  With the recent talk of deflation, it doesn’t take a genius to figure out what Bernanke will likely do to avert a crisis.

Expect the bailouts to continue, especially under the new democratic leadership. The cost of bailing out AIG, and Fannie and Freddie, has resulted in a growing price tag that will likely top $250 billion by the end of the year. The Big Three will help continue that trend as the poorly run automakers join the line of companies deemed “to big to fail.” The U.S. has $13 trillion in debt and that number is increasing by $1 trillion every 15 months.  Someone has to pay for this debt at some point, which will result in higher taxes in the long run.

Sometime in the future, the appetites that foreign buyers have for our debt will dry up.  In fact, the $586 billion investment that China is making in its own country may affect demand for our debt down the road.  As rates start to rise as a result of a lack of demand for our debt issues, I wouldn’t be surprised to see our monetary leaders begin to monetize our debt.  With our trade and budget deficits, money printing, low savings rates and our overall need to print our way out of the crisis, I don’t think you can go wrong going long printing presses and taxes.

Disclosure: none