When the US social-democrats (Republicans) retreated to extreme socialists (Democrats) on the issue of "Fiscal cliff" they said that they will focus of debt ceiling debate to press comrade Obama agree on spending cuts. After that The President placed an ultimatum for the debt ceiling and rejected any negotiation. And won a victory.

Now Republicans say they will focus on automatic spending cuts that are to start March 1st, to press comrade Obama to negotiate. They also promise to use the need of passing a new budget bill by the end of March to make The President more flexible.

But what if comrade Obama again says "No"? What is the difference between the fiscal cliff and debt ceiling - from one side, and the auto spending cuts and the budget - from the other?

I don't see any difference. The President is the same, The House is the same, The Senate is the same... And of course - the Washington lobbies and interests are the same. So what will prevent the social-democrats of retreating again to socialists in an effort to grant money for their sponsors and connected with them government funded businesses?

The main interest of everyone in Washington is to spend. Everyone likes spending, so the differences are only in the ways of spending. That is why I am not joking when I am using political terms like "social-democrats" and "extreme socialists". In Washington everyone likes to spend with Republicans more on military and Democrats more on social issues. No line likes to cut spending.

If the automatic cuts are activated in March, most of the losses will be for Republican sponsors, as most of the cuts are from military spending. This means that Republicans will seek for a change more than Democrats. And this means that comrade Obama is in stronger position again.

I don't expect serious change in general US policy. It is just a question of finding an excuse for social-democrats to retreat again. They have the interest to do this, and they just need to name it a "victory" or a "responsible policy". In Washington there are no much really conservative politicians. And with future they will become less and less with more and more people becoming dependent on government granted income. The US democracy simply has crashed.

What does the last Republican capitulation mean?

It means that high deficits will continue with $1 trillion every year added to the debt. As most of this deficit is financed by FED (no much real investors are interested in US debt) this means the QE programs will have to continue. In one or another way FED will have to find an excuse to continue the QEs. At the moment the size of QE is $85 billion monthly or $1,02 trillion per year. This is about the size of the deficit, i.e. FED can finance it alone. If some naive investors still remain in US bond purchases, the size of the QEs can be a little lower. But not much lower.

This guaranteed money-print means a continuing erosion of the confidence in dollar and US assets as a whole. This will even worsen the situation with real market motivated investors in bonds. The Bulls will dominate in Gold, metals, food and energy. And in a not so distant future, the bill of excessive inflation will have to be paid.

Dobri
Jan 23rd 2013