Evan Schnidman's  Instablog

As we all loosen our belts from a week of Thanksgiving gluttony and return to peering into the fiscal abyss, it is our status as a nation that eats too much and exercises too little that may help us solve our fiscal woes. While nearly 36% of Americans are obese, what is more alarming is that our government is obese too; our budget deficit is over $1 trillion this year alone. However, our status as an overweight nation constantly trying new diet fads means that we should understand what it takes to lose weight. Simple crash diets don't work, but neither does an exercise plan without any alterations to our food intake. Essentially, our constant dieting should be used as a lesson in fiscal discipline.

Diet Analogy

If we consider tax revenue as the food that nourishes the government and spending cuts as exercise needed to remain trim and fit. This analogy holds up surprisingly well when we look at the plans presented by policymakers.

The right wing plan resembles a crash diet; food intake is dramatically slashed and we begin rigorous cardiovascular exercise (Medicare, Medicaid and Social Security spending cuts). The competing left wing plan involves cutting out hot dogs (taxes on the low and middle income) in order to survive on steak (taxes on the wealthy) while only lifting weights (Defense budget cuts) a little bit each day. In the long run, the right wing plan will leave us emaciated and unable to continue exercising while the left wing plan will cause us to become obese. So, neither diet will work.

A sensible diet should recognize the need for both healthy food intake and a variety of types of exercise. In terms of healthy eating, it is much healthier to eat more steak than hot dogs, but everything should be consumed in moderation. Similarly, the idea that we can continue making policy without cardiovascular exercise (cuts to entitlement spending) or weight training (cuts to the defense budget) will leave us obese and without sufficient musculature, no matter what we are eating. So, we must be sure to trim down with cardio while toning up with some weight training.

It is also worth note that we should not exercise those parts of the body that have already been over-worked and under-nourished. For instance, the Securities and Exchange Commission (SEC) has taken on many new regulatory duties since the start of the 2008 crisis, but Congress has not provided adequate sustenance to feed the hard working muscles in that part of the body.

Fundamental Flaws

This treatment of the U.S. government like a human body attempting to diet is obviously a caricature, but it provides some insight into the fundamental flaws with each approach. Republicans want to eat very little and do exclusively cardio so the government becomes so weak that it collapses. Democrats want to eat what they want (mostly steak) and occasionally lift weights, despite the fact that will leave them so bloated an inefficient that they can't accomplish simple tasks.

In some ways, the President needs to serve as a personal trainer (who learned from the fitness gurus, Alan Simpson and Erskine Bowles) explaining that a good diet involves eating a healthy balance of foods while doing a wide variety of exercises. Unfortunately, President Obama and Speaker Boehner have both demonstrated themselves to be enablers of each side's bad habits, not trainers motivating the nation get in shape. Making matters worse, in this case Congress does a great job of representing the American people; like their constituents, members of Congress don't want to go on a diet or start exercising, no matter how detrimental it is to our long-term fiscal health.

Investor Perspective

When S&P downgraded U.S. debt last year, it was like a doctor informing the American people that we have a blocked artery, but when Obama and Boehner couldn't agree to a deal the first time, they failed to put in a stent. So, now it is time for bypass surgery and it better not fail. This is why hundreds of business leaders from every geographic region and industrial sector have converged on Washington to lobby for a solution. I am of the belief that a deal will be reached, but it will probably disappoint almost everyone. So, as we watch and wait, investors should expect a deal to come through that will kick the can down the road. The equity market will react positively to averting the cliff, but it will then retrench as business leaders begin expressing disappointment over the lack of a long-term plan that will facilitate future business growth and development.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

As expected, the October 23-24 FOMC meeting yielded a continuation of the current $40 billion/month asset purchase plan, continued low interest rates through mid-2015, and Twist through the remainder of 2012.

The Committee did sharpen some language indicating they would let Twist expire at the end of the year. They also specified that until Twist expires, the combination of new asset purchases and "reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities" amounts to $85 billion/month in MBS purchases. This will presumably revert down to $40/month once they let Twist expire.

The only new news coming out of the FOMC is the statement: "the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens." In other words, as long as inflation remains near or below the 2% target, QE3 will continue even as the economy improves and it appears we no longer need it. This is just another, stronger way of saying that quantitative easing is here to stay indefinitely.

Beyond that line, some observers may note that the FOMC did not move toward zero interest rate policy that is driven by economic indicators (a mix of employment and inflation) and Charles Evans and Narayana Kocherlakota have both advocated. I suspect this will be taken up in December, but it may be put off until next year depending on the proclivities of the incoming voting Regional Bank Presidents for 2013 and Chairman Bernanke's stance on the policy.

So, the big take-away from today's FOMC press release is that the QE3 is here to stay, even as the economy improves. This means that investors need not fear an improving economy pushing rates higher or limiting the flow of cash from the Fed; that is a long way off.

Apparently coming out against an audit of the Fed is an unpopular stance because nobdy seemed interested in publishing my commentary on it last week. So, this morning I posted a version of the article on FedPlaybook.com explaining that Romney was weighing the idea and examing all of the ways it is bad for monetary policy. Sure enough, the news just broke that Romney is going to include the Fed audit as part of his platform. Take at look at THIS ARTICLE examining all of the negative economic implications of this policy.