The elections will not change much of anything

Most of the mid-term election results in the United States are now in.  What can we expect now that the Republican party has taken control of the House of Representatives?  What can we expect now that Democrats have lost the ability to solely dictate the legislative agenda?

My answer: more gridlock.

I have been talking for the better portion of the year now about the “game of chicken” that has existed between scared, non-spend thrift consumers, and scare, non-hiring businesses.  I have argued that one of the ways to fracture this paradoxical system is for an outside entity, like Congress or the Federal Reserve, to influence the system from outside the system.  I have highlighted the fact that the Federal Reserve already has interest rates in the United States at, or near zero.  Basically to borrow money right now is free.  Yet, despite that, very few folks are actually borrowing money to finance their “genius” ideas that might lead to economic growth.  That leaves Congress.

Congress is now more gridlocked than it was before: the House Republican vs. the Senate Democrat.  Republicans expecting a big move toward lower taxes and a pro-business environment are likely to be undercut by a recalcitrant Senate.  Democrats expecting the end of the world because they no longer hold both houses of Congress are equally wrong.  For a law to pass both houses of Congress must approve the change.  Now no one has an incentive to work with the other party.  Two years from now both can point fingers at one another for having been the obstacle to change.  For the economy, this means that there is no external positive force to break the logjam.

Unfortunately, negative external forces may impact the economic system.  There may be another severe terrorist attack.  There may be another massive natural disaster.  There may be additional economic shocks to the system, like a Greek bond default.  And so forth.  In my opinion we are worse off after the mid-term elections as investors than we were before.  The reason is what I think will be insurmountable gridlock.

All of this means that the economy is going to have to innovate itself out of its slumber.  And that means that it is going to be many years until it all feels right in the world again.

Jason