US Monetary & Fiscal Policy

Monetary
The Fed has moved on to QE 4. QE 3 was a place holder wherein the Fed was supposed
to buy $40 bil. a month of MBS a month. It has been running behind in fulfillment, but
maybe it will make it up quickly. With QE 4, the Fed will continue the MBS purchase
program, and It will add $45 bil. a month in Treasury note and bond purchases starting in
Jan. 2013. It will continue the program until the inflation rate edges up to 2.5% and /or
the unemployment rate declines to 6.5%. With these guideposts, QE is designed to support
the labor market by providing liquidity behind an economic expansion until unemployment
falls to a more reasonable range and to protect the real wage from the ravages of an
inflation induced by commodities speculation if players use the large increments in monetary
liquidity to pour into the commodities markets, especially fuels and foods. In short, the Fed,
with this new controlled QE program is not going to issue a "blank check" for guys to chase up
commodities prices with impunity as occured from early 2009 through mid - 2010. The
inflation consequences of hefty rallies in commodities prices have penalized the real wage
over the past couple of years in concert with reduced current $ wage growth as businesses
moved in to exploit a weak labor market. This move by the Fed is a positive for the stock
and commodities markets, but the inflation limit control factor adds more risk to the
equation, risk that would normally reflect boosts to short term rates (which the Fed does not
now plan to raise soon.).

Fiscal
Obama has failed to sweet talk the GOP into the 21st century. So as the Nation's chief
executive, it falls to him to kick ass with gusto over in the GOP side of the House. As
much as I would like to see that, putting on income constraints for 2013 to raise more
tax revenue requires a very light touch else the weakest part of the economy -- household
income -- could be punished enough to create some significant drag for the economy. I
am particularly concerned about restoring the 2% cut in the payroll tax.

The polls show that folks do not mind raising taxes on the wealthy and deplore the idea
of trims to Social Security and Medicare. Both the president and the Congress have to
free themselves from lobby driven and ideological constraints to figure out ways to sensibly
corral the world's most expensive health care delivery system, a system that is highly
inefficient. Soaking the rich is not the solution. Intelligent cost management is. Neither the
Dems or the GOP seems ready to tackle this urgent task yet.

There is a decent level of investor confidence that official Wash. DC will work out a
deal on the cliff which will be punitive short term in but a minor way. A fast 700 points off the
Dow would hasten the process of closure, but barring a tantrum on Wall Street, the show
along the Potomac may just drag on.