Monday, January 4, 2016

How Will the US Election Impact Monetary System Change?

As we head into 2016 everyone is aware that the US will hold its election for President this year. While this blog tries to avoid politics as much as possible, it would be naive to think that the upcoming elections will have no impact on the financial system or potential change in the monetary system. Below we will try to list in bullet point form the various ways the election could have an impact.


- the most obvious is Fed policy. Normally in a presidential election year the US Fed tries to avoid looking as if they are playing a favorite leading up to the election. On the other hand, the Fed normally gets some pressure from incumbents to create an easy money atmosphere in hopes the economy will show solid performance ahead of the election. This year will be interesting with the Fed trying to convince markets it can raise interest rates into what could be the teeth of a economic downturn. If that does happen, most analysts believe it will hurt the Democratic nominee for President as most voters tend to blame the President if the economy is faltering. So this will be the #1 thing to watch in the coming election year. Will the Fed keep trying to raise rates or will they reverse course quickly due to pressure from poltical incumbents?

- The recent new government spending bill is already evidence of how an election year impacts things financially. An enormous spending bill that everyone admits will sharply increase the US deficit sailed through Congress and was quickly signed by the President. No one wants to be blamed for a downturn in the economy so both parties did what they could to try and keep money flowing even though a lot of it has to be borrowed.

- If the economy holds up, we can expect that the status quo of divided government is likely to continue. The Republicans most likely retain the House of Representatives while the Senate could go either way (but probably slight advantage to Republicans holding it). The Democrats will be the favorites to hold the White House because voters won't have a reason to turn against them if the economy holds up. Incumbents always have a huge political advantage if things remain fairly stable.

- If the economy heads south things could get interesting. A number of questions will arise. Will the Fed try to step in once again to reverse the trend? If they do, will it work or will they lose all credibility in the markets? Who will voters blame if things go south? Normally they blame the President and are more of mind to throw out incumbents. But with the US government divided now for so many years, it's hard to say how voters would react this time. They might just decide to throw everyone out and start over depending on how bad the economy was performing.Donald Trump will likely benefit from any significant downturn because he has been very vocal in saying the US is "in a bubble" lately and that it could get ugly if that bubble bursts.

Summary: Unless we get another full blown financial crisis in 2016, we can assume that the election year will not have a major impact on the pace of change in the global monetary system. Things will probably just plod along at a slow pace. 

However, if we were to get another major financial crisis like Jim Rickards predicts, all bets are off. We could see the potential for all kinds of change and see the pace speed up quite a bit. It's a complete unknown (at least to me) how the public would react to all this if it did happen. The research I have done for this blog suggests to me things could get pretty messy. I would expect a lot of finger pointing of blame and a massive battle to gain the confidence of a majority of the public as to how to deal with the crisis. 

Those in charge of the current system would probably try to shift the solution more to the global level at the IMF as Jim Rickards has forecasted. Those who are skeptical of the present debt based monetary system will no doubt be pushing the idea that those running the system failed the public and only a complete end to a debt based fiat system will regain the confidence of the public in general. They will insist on some kind of real asset backing to whatever new currency might rise from the ashes. Where Russia and China might come down on this debate is unknown at this time although both have been building up huge gold reserves. Some believe that Russia and China would support a fiat based SDR currency system while others think they would insist on a gold backed currency system of some kind.

In the complex system we now have, I have no idea how that battle might turn out. I will just continue to follow events and report as best I can what actually does happen here on the blog. The elections in 2016 may or may not end up having much impact on things.

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