3 Things

If you can remove yourself from the anger, vitriol and wishful thinking for 10 minutes, the US predicament can be analyzed in terms of 3 things.

1. The stabilization and re-capitalization of the financial system from the crisis.

2. The reform of the regulatory landscape taking #1 into account and the fragility of the system being reformed.

3. The addressing of the US fiscal situation on a medium term basis once the economy is resilient enough to withstand the cutbacks and tax increases.

Inside of this macro agenda there is ample room for disagreement to process and ideological leanings. The agenda itself seems relatively easy to follow. Now for the surprise: This is the 3 prong agenda that Sec. Geithner laid out and has remained committed to since I met with him in 2010. The value of the dollar has been moved lower to our benefit in the short run. The Fed may defer to Treasury on the currency but moderately negative rates out several years on the curve are the fundamental basis for this devaluation. The question for players now is how much will the engagement of #3 reduce growth prospects and hinder the process.

The alternative to addressing these issues on our own terms is evident in Europe today. As bond markets collapse the ability to execute similar agendas is supplanted with crisis management and severe economic retrenchment. Greece, Ireland and Spain do have something that the US does not however. The citizens view themselves in terms of nationalism. "Europe" is a term that they will threaten to abandon when things get difficult enough. The hyphenation of the American identity could rip at the fabric of society if/when the fiscal cutbacks start to bite. As it stands today, Americans do not view these important issues as their own. They are the problems and mistakes of "others."

For the time being, the chaos elsewhere buys us some time to deal with the agenda above. Additional tweaks to #1 and #2 should continue as the "Hilary Step" (of which we've written much) of #3 is dealt with.

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