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Our grandchildren were over last weekend–two boys ages 5 and 3.  At one point the 3-year-old was telling me about being disobedient and how Daddy had to give him a big spanking.  Now I know my son and I’m sure that he was providing gentle discipline, but the point wasn’t lost and can be applied to last week’s election.

Much has been made of the Republican’s gains in the House and Senate, and their effective control of Congress.  This was clearly a repudiation of the Obama, Reid, and Pelosi policies of economic stagnation.  Make no mistake about it, this was about the economy.  The Democrats insistence on spending taxpayer’s money ineffectively, squandering it, actually, passing huge and unpopular bills, and their complete lack of caring about the taxpayer and the cumulative effect on the economy led to their downfall.

Part of this is due to their arrogance. Part is due to the Democrats’ lack of understanding of how our economy works.  America is and always has been a capitalist society.  Government control and planning is an anethema.  Our economy works best when businesses and individuals are confident and can make plans to invest, spend, hire and borrow with a degree of certainty.  America has not had any level of confidence in over two years, since the collapse of Lehman Brothers in September 2008.  The Democrats, and President Obama, Harry Reid and Nancy Pelosi specifically, have done everything they could to ensure a lack of confidence by ramming through legislation designed to further their agenda and in the process, scaring the living crap out of people.  Hence the rise of the Tea Party, and the big spanking.

Everything the Democrats have done has suggested higher taxes or significantly additional costs and fees.  First, they’ve managed to pass a “stimulus” bill that has to be paid for somehow, and that has failed to stimulate much.  Second, they passed Obamacare that will raise the cost of doing business for everyone, and I mean everyone, and must be paid for with additional taxes.  Third, they passed a “financial reform” bill that will raise the costs of banking and lending, with the net result of limiting access to credit.  Finally, their failure to extend the Bush tax cuts raises everyone’s taxes, regardless of income, by a minimum of $2,000 next year.  All of this money has to come from somewhere.  And so people are nervous and nervous people do not spend money.  Nervous businesses do not hire and invest in infrastructure and equipment.  And the cumulative effect of all of this is a lack of revenue flowing into the US Treasury.  You cannot have 9.6% unemployment and expect treasury tax revenues to increase.  And this is why the Democrats got spanked.

Republican leadership now has to lead or they’ll get spanked.  They need to undo the uncertainty and instill confidence in the electorate and business.  This means revising all of the poor legislation that was passed the last two years, if not repealing it altogether.  This is what they were elected to do.  If they pass legislation and President Obama vetoes it, then in two years, the voters will have another chance to spank.  And despite all of his rhetoric, I don’t believe that the President truly gets it.  There is still an incredible lack of humility emanating from the White House.  Even this week in Seoul, the President got spanked by the Europeans and Chinese, and he refuses to acknowledge his policies aren’t working; rather, his policies are “misunderstood”.

On a separate but related topic, The Federal Reserve and Chairman Ben Bernanke has decided to print another $600 billion and buy back US Treasury securities in a process known as Quantitative Easing (QE).  Flooding another $600 billion into the economy over the next six months is like pushing on a string.  Until the government gets its fiscal act together, it won’t do anything other than increase the money supply with no increase in aggregate demand for goods and services.  This money has to go somewhere, and investors will search for a place where they can get a reasonable rate of return.  So, after the election, there was a rally in the stock and bond markets, but this week, stocks and bonds sold off, but commodities rallied–specifically oil, cotton, soybeans and gold.  On Friday, even commodities weakened.  The stock markets have generally rallied since September 1 because corporate earnings have been solid.  But earnings are a result of sales, and in order for sales to increase, people have to want to risk spending the money, which brings us back to fiscal policies.

So the next month will determine whether or not the resurgent Republicans and spanked Democrats can and will work together.  The amazing thing about our economy is that it hasn’t collapsed despite collosal mismanagement in our nation’s capitol.  Stay tuned.  Things are about to get very interesting.

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