New Congress must face deficit

Tuesday's election could have a dramatic impact on the economy.

Updated: May 2, 2013 5:21PM

Does it matter how Tuesday's vote turns out- Of course, it matters

that you vote. Otherwise you haven't earned the right to complain about

anything that Congress does -- or doesn't do-- in the next two years.

But as the political analysts examine the possibilities, the real

question is whether it will make any difference in the policies that

will affect our economy in the next two years.

The political possibilities are vast. The election could result in a

Republican takeover of the House, and a possible Republican majority in

the Senate.

There's even the long-shot possibility that the Tea Party candidates

could split the Republican and independent vote, leaving the Democrats

with more power than anyone anticipates.

Then to complicate matters, no one really knows how the Obama

administration will respond to the ultimate outcome. The result could be

gridlock -- or compromise.

Election impact

But once the numbers have been counted, the impact on the economy

could be dramatic. It's as if the financial system has been sitting on a

see-saw, depending on where you come from. Right now it is pretty

well-balanced between the possibilities of future inflation and looming

deflation.

The stock market always hates uncertainty, so it has recently been

poised between those two alternatives. The recent higher bias of the

market (and gold) seems to point to an eventual inflationary resolution.

The possibility of even more deficit spending and stimulus makes stocks

attractive in spite of the economy. After all, all of that money has to

go somewhere.

And the election's outcome will have an impact on the Federal

Reserve, as well. Now we all learned in Econ 101 that the Fed is not

impacted by politics. We did learn that, didn't we- But the Fed's

governors and its chairman, Ben Bernanke, are not oblivious to the

outcome of this election.

They're poised to print money -- or, as it's now called,

"quantitative easing." If the Fed suspects that gridlock will be the

political outcome of the election, they might be more inclined to buy

bonds and create liquidity. After all, someone has to keep the economy

from going down the deflationary drain.

Facing the deficit issue

The really big questions to be decided by this next Congress revolve

around taxes, spending programs, and trade. They may also revisit health

care, and even financial reform. But the focal point of the debate

should be our federal budget deficit.

In the past two years the deficit has jumped from $161 billion to $1.3 trillion.

General spending has increased from less than 20 percent of our economy, our GDP, to more than 25 percent.

It's not your imagination that the government is quickly taking over

our economy, much like crabgrass. And, like a weed, it blends in at

first because it's all green. Only ultimately do you realize that it's

destroyed the lawn.

The key question facing the new Congress will be how to control the

huge and growing national debt, while we still have some credibility in

the global economy.

Will they enact policies that encourage the economy to grow its way

out of debt- Those policies would reward investment, entrepreneurship

and hard work. Or will the next Congress try to squeeze the failing

economy harder, exacting more taxes-

Politics aside

It's certainly not clear that even a Republican majority will do the

"right thing." After all, the last time the Republicans ran Congress

they racked up huge deficits in the midst of a pretty good economy that

had generated growing tax revenues.

There's plenty of opportunity for change when the new Congress is

seated in early 2011 -- and plenty of opportunity for mischief when the

current, lame-duck Congress meets again briefly in December.

What do you think will happen- Is gridlock the best we can hope for-

We're already on track for more slow growth, and more deficits. Can we

afford to not do anything for the next two years- Will the world

let us get away with that kind of indecisive policy and continued

"quantitative easing" -- while they hold piles of dollars-

The real question: Is there any chance of productive compromise to set our country on a better course-

Your vote is important. But, don't just vote blindly out of party

affiliation, or to protest, or because of smarmy commercials being run

by all of the candidates. In many races, we haven't been given great

choices. So once the electoral fervor ends, all Americans will have to

stay involved and continue to speak up. Our future is at stake -- and

that's certainly The Savage Truth.

Terry Savage is a registered investment adviser.

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