Recent Happenings

It looks like the recent Senate race was about budget deficits as much as anything else. It's something people can latch onto quite easily, even if it's not the same relationship that an individual has with their credit card. And I've heard the deficit often conflated with the idea that 'China owns us', even if it that too has no semblance in reality.

Fiscal or monetary austerity at this point and time would be depressionary in its effect. I don't even think it's where most of big business wants to go yet.

Volcker apparently has regained influence within the administration; how far that extends remains to be see. Volcker is no stranger to austerity, and as Fed chairman oversaw a strong dollar rally after jacking up interest rates. This also led to the Latin American debt crisis in the 1980's. There has been a lot of borrowing in dollars recently, and any type of unforeseen rally would leave a lot hedge funds (and possibly countries) broke. While Bernanke is obviously fond of the printing press, with his re-nomination in doubt, he might have to shift policy in this regard.

China has been forced to tighten credit expansion in recent days. The bubble arguments are well documented, but I think the overall point is that China does not currently have the ability to drive the world economy. They need to export; even just soaking up internal capacity requires massive loan expansion. They also don't have the ability to absorb capital inflows; after all, there isn't much of a Yuan bond market. This means inflation can blow up quite easily.