Wednesday, July 15, 2009

Gregor Macdonald on Washington's dilemma

Another interesting article that popped up in my Twitter stream last night: this one is from Gregor Macdonald (market/energy blogger and Stocktwits' MacroTwits host) on Washington's dilemma and the potential for an "American devolution".

"Washington is bluffing that it will not bail out California, and every other state suffering from collapsed revenues and massive job losses. If cuts in police and schools don’t force DC off from its current position, then the math will. Because in many states the aggregate revenue losses and looming cuts to state payrolls will largely render the intended effects of federal stimulus as moot.

Frankly, unless Washington prints money and bails out every state that needs capital, including California, federal power will decline amidst this severe economic recession, and the process of a soft American devolution will begin. If you think this idea is outrageous, then you’ve still not come to terms with a core reality of our current situation: the structure of this financial crisis is wholly different than any in our post-war era. This isn’t a recession. This is collapse."

I'm finishing up Gregor's post as I write this. I have to say that I'm intrigued by the idea of a potential gradual decline in federal power against the backdrop of this economic downturn. Is such a trend likely to occur, or will Washington forestall any reduction of its Leviathan reach with the aid of the printing press?

Read on to find out why the internal structure of today's US economy makes this period much different from recessions past.