Crescenzi: Obama "Buying Time" To Fix Debt Problem

It is probably no coincidence that the interim bottom for the equity market was set the day before President-elect Barack Obama began a series of public announcements and appearances meant to address the economic and financial crisis, stabilize the financial markets, and shore up confidence.

The low, of course, was set on November 20th, the day before Obama announced that Timothy Geithner would be his nominee to become U.S. Treasury Secretary. I said on the following day that Obama's announcement could mark the turn and that beyond Geithner's appointment what was important was Obama's quick rollout of his economic team, which cast the President-elect as an activist on the financial crisis, having moved quickly and with conviction.

The tone that Obama set will likely continue to benefit the financial markets for weeks to come, although there will be plenty of obstacles along the way. Nevertheless, Friday's dreadful jobs report has reinforced Obama's mandate to act decisively, and all indications are that he will. In addition, the Federal Reserve has been empowered by the news and it will likely make further forays into the realm of quantitative easing and will likely expand its program of purchasing securities, targeting long-term rates, and of funding the consumer and business lending markets.

Obama can only achieve success if the answer to the following question draws no trepidation: If the U.S. is backing the financial system, who is backing the U.S.? Right now everyone is, which means that the government plan to help the economy and the financial system will work. In other words, the Keynesian and monetarist approach SHOULD work. The word "should" is key here. It "should" work just as it has for 70 years but the idea that the U.S. is seeking to exit a debt problem with more debt creates a singe of doubt.

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The saving grace to the U.S. debt dilemma is this: The U.S. remains the dominant world power, politically, economically, and militarily, and no nation has been spared in this crisis, which means that on a relative basis, dollar assets will remain supported, enabling us to get out of the mess through the Keynesian and monetarist approach. Keep in mind also that only 10% of all U.S. debts are held by the U.S. government and that at $5 trillion the federal debt is manageable as a percentage of the $14 trillion U.S. economy, which gives Obama clearance on the scale of his fiscal endeavors.

A Transformational Downturn
The financial and economic crisis will be a transformational one that results in changes to our economic and financial system that would not have occurred if not for the crisis. More than 30 years in the making, for example, has been a change in the way that the U.S. produces and consumes energy. I have personally hoped for such a change since the 1970s when as a schoolboy I took to heart and adopted the mantra of "save a watt" placed on the light switches at my New York City public school. It is a theme the nation forgot and paid for eventually.

It is a theme that will be struck in Obama's forthcoming economic stimulus plan and help reduce the nation's energy dependence for a more stable and secure future. It is a hopeful message, and hope is a theme that President-elect Obama said this weekend he would seek to instill through various ways, such as in science, for example, an area the nation has often looked to be inspired. I am a Reaganite, and there will always be only one Ronald Reagan, but I see in Obama many of the qualities that made Reagan great, chiefly the ability to inspire and create optimism.

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Confidence hence looks likely to gain in the weeks ahead, leading up to a burst of optimism sometime before Obama's inauguration and lasting into the spring. Confidence equates to lower risk premiums, which should enable risk assets to outperform in the time ahead. Investors have already moved one layer out the risk spectrum, having bought agency securities and agency mortgage-backed securities after the Fed said two weeks ago that it would purchase these securities to the tune of $600 billion ($100 billion agencies, and $500 billion MBS).

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Sustainability will of course be an issue when the financial markets begin to sense light at the end of the tunnel, and the U.S. need for massive funding of its efforts will deserve scrutiny. Nevertheless, as the preeminent power lead by a man determined to implement transformational ideas to fix the financial and economic crisis, and with no nation ready to have their currency replace the U.S. dollar as the reserve currency of the world, we should be confident that the Keynesian and monetarist policies deployed will work and buy the U.S. time to fix its debt problem.

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Tony Crescenzi
Tony Crescenzi

Tony Crescenzi is the Chief Bond Market Strategist at Miller Tabak + Co., LLC where he advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. Crescenzi makes regular appearances on financial television stations such as CNBC and Bloomberg, and is frequently quoted across the news media. He is also the author of the forthcoming book, "Investing from the Top Down," "The Strategic Bond Investor," and co-author of the 1200-page book "The Money Market."Crescenzi is a contributor to RealMoney.com."