Blast from the Past

(1) Japan engaged in multiple rounds of quantitative easing during their historical (and still on-going) bout with deflation and a stagnant economy. Both times, the Japan stock market saw material gains over 50%+ even if the economy itself only improved modestly.

Ben Bernanke's first round of QE has helped jumpstart the American stock markets by creating a rare bull run that began in March 2009 and just hasn't stopped since. Meanwhile, the US economy has moderated to a 2.6% GDP rate of growth (above deflationary scare levels but well below the 4% goal level). Ben started his second round of QE last month essentially and will continue it through early 2011.

Does that translate into continued market gains, and strong ones at that? If so, does that mean that the price of commodities and oil continue to surge? And if so, aren't rising producer prices (via commodities) and rising gas prices at the pump some consumer spending headwinds that may prevent the economy from moving above that 3% growth level?

(2) Many economists will say that the perfect solution for the 2008 crisis is/was = immediate fiscal and monetary stimulus coupled with medium and long term austerity measures. Problem is - many economists will also tell you that that is very difficult to achieve politically.

So far we've received the immediate/short-term fiscal and monetary stimilus (see stimulus bill, quantitative easing, TARP, bank re-capitalizations and extension of Bush tax cuts). Now the question comes: will Congress be able to agree to medium term and long-term spending reductions (i.e. balancing the budget and restructuring long-term entitlement programs, healthcare, medicare, social security, etc)?

Congress just added nearly a Trillion dollars of debt to the deficit with the Bush tax cuts extension. Then what did they do - attempt to pass a fiscally responsible and balanced budget? No, they tried to pass a one year budget bandaid that included billions of dollars in earmarks to earn Senate votes.

If there is no political will or compromise on medium and long term spending cuts, we risk being as poorly leveraged as Spain, Ireland and others in 5 or 10 years.