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The deal cut by President Obama and Republicans is being hailed by the talking heads on CNBC this morning as a stimulus for the economy. Really? I suppose it is stimulus in the sense that it is better than raising taxes, but this package should not be mistaken for good economic policy. Hereâ??s the main points:
The stock market is up today and many are crediting this compromise but I find that hard to swallow. There is nothing here that was not expected except for maybe the estate tax bit and that has little or no stimulative effect. And if the market is up because of these tax changes, why is gold up?
If this were a major positive change in economic policy we would see the flow of capital into gold start to reverse. So far that hasnâ??t happened, although to be fair, it is early. This deal is a minor positive for the economy - if you ignore the fact that it gets us even deeper in debt - but I donâ??t think this is the change weâ??ve been waiting for.
â??If this were a major positive change in economic policy we would see the flow of capital into gold start to reverse.â?
First off, youâ??re assuming the market for gold is rational. Gold is CLEARLY in a bubble, and will â??reverseâ? itself in one swift downward gyration. That type of reaction is far from rational, and history is full of those market reactions.
The deal isnâ??t done yet. â??Now, this is far from a done deal. This package is designed to get 60 votes in the Senate, but it may not pass muster in the House. The House Democratic caucus, which is generally more progressive than their Senate counterpart, is reserving the option to revolt. And Tea Party Republicans are threatening to vote "no"? because of the unemployment insurance extension that is attached.â?
(http://www.opencongress.org/articles/view/2126-What-Exactly-Is-In-Obama-s-Tax-Cut-Unemployment-Extension-Compromise-?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+OpenCongressCongressGossipBlog+%28Open+Congress+Blog%29&utm_content=Google+Feedfetcher)
Clearly in a bubble? Not rational? Well, thatâ??s your opinion. I donâ??t happen to agree. Will gold fall rapidly when it starts to fall? Well it certainly can if policy changes. Back in 1979-80 when gold hit $850 during Volckerâ??s monetarism experiment, it fell rapidly as Reagan went ahead in the polls. But that was because the market was anticipating a change in policy, specifically the Reagan tax cuts. The change in policy affected the demand for dollars relative to gold. If we get a clear change in policy now that encourages productive investment then gold can certainly fall rapidly again. But that wonâ??t be because the market is currently irrational and it suddenly decides to become rational again. It will be because policy affects the demand for dollars.
As for whether the deal is done, I agree that it certainly isnâ??t yet. Obamaâ??s left flank is not happy with this deal and may very well vote it down. If they do though, I would expect it to pass as soon as the new Congress convenes.
Oh and tea party Republicans will change their tune after they are sworn in. Even tea party members have relatives on unemployment and they might be against extending benefits in theory but when their brother in law ends up on their couch, I suspect theyâ??ll change their mind.
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