Monday, April 13, 2009

A new era of political alchemy?

Clean energy is the present buzz word that excites voters. Obama believes in political expedience. He is a politician, trained as a lawyer. He is not an economist or an engineer interested in feasibility or efficiency, nor does he care. He uses government money to sponsor this. He may well put lame-duck US auto companies like GM on subsidies to produce such vehicles. There is no guarantee, however, that the technology employed will succeed. Generally out of 10 high tech projects, only two new technologies prove viable. There is still the formidable commercialization challenge.

The real issue for the US economy is competitiveness and productivity in goods and services that creates new wealth and value.

The Obama administration is continuing the policies of the previous Bush administration in subsidizing the US banking industry rather forcing them to write off the bad loans and take the losses. The hope is that by massively increasing the money supply, prices will again begin to rise in the housing markets and the banks will be made whole again on their bad assets.

The new twist to the Obama administration is the return of big government to the broader US economy, financed by deficits and public debt. The theory is that the debts will be paid off by breakthroughs in new technologies like green energy.

The risks are that the resulting debt inflation in both government and households as well as increased tax load will crowd out demand for goods and services and lead to prolonged period of economic stagnation in the US.

In such a scenario, there will be little demand for green cars because people will not be able to afford them, even if a reliable technology is developed and proven cost efficient.

The US will become less and less competitive with the rest of the world, which proves more effective in use of resources. Whatever is produced in the US will cost far more unless there is a massive depreciation of the US dollar.

Unlike FDR, Obama is coming into his presidency at the beginning of the crisis. The future of his presidency depends on his abilities to manage it.

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