Throughout 2009, the government has repeatedly intervened in the private sector and the markets -- backstopping AIG (NYSE:AIG), for example, and offering an unlimited credit line to Fannie Mae and Freddie Mac. Now, the government is toying with the idea of taxing large banks, like Bank of America (NYSE:BAC), JPMorgan Chase (NYSE:JPM), or Wells Fargo (NYSE:WFC), in order to recoup losses incurred from bailing out the financial firms during last year's crisis.
All of these interventionist actions have served as a big influence over private industry, if not the markets. Washington as a catalyst will be a major theme for the markets this decade, given the degree of its involvement at the present time. "Without question, this is the dominant theme that is going to last for a long time, especially if they pass health care," Andrew Busch, global currency and public policy strategist for BMO Capital Markets, said in an interview.
The health-care bill is just one of the many policy changes looming in Washington that is creating uncertainty for employers. And besides stalling companies' hiring plans, passage of the health-care bill could worsen the fiscal situation. The deficit is already growing at a brisk clip, thanks to the war on terrorism and the stimulus package aimed at pulling the country out of recession. Busch is not optimistic: "The fiscal situation in the U.S., while today [it] doesn't appear to be too dire, in a very short period of time is going to turn sadly almost catastrophic."
Government debt is expected to swell to 90% of GDP in the next few years, which could shave a percentage point off annual economic growth and scare off investors. The Obama administration projects the federal deficit will add more than $10 trillion to the federal debt by 2019. Alan Auerbach, an economist at the University of California, Berkeley, forecasts that under current circumstances, U.S. debt will breach a whopping 108.6% of GDP by 2026, which would surpass 1946's record.
Of course, this all bodes very poorly for the U.S. dollar. Busch says he thinks there is going to be a progressive move lower in the dollar over a number of years, during which we'll see the dollar lose 10% to 15% per year going forward.
The other shoe waiting to drop, according to Busch, is the states' individual fiscal situations. "Once the federal stimulus runs out -- the money that supported states in keeping teachers and other governmental employees on the payroll -- these states are in serious trouble," he said. "California … is the poster child."
We're going back to more regulation, higher debt levels, and higher taxes, Bush predicts. "The only thing that we don't have that would make us just like the late '60s, early '70s, is that we do have the tax brackets linked for inflation," he said. "That’s the best thing that we have. That’s about the only thing that's different in the outlook for the next 10 years that I see, so this is not good."
You can read more insight from Busch by clicking here.
