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By Staff | Nov 20, 2009

The House passage of a health care reform bill was viewed as inflationary. The reason why is that it continues the country on a path of fiscal irresponsibility.

On a personal basis, we may want things, we may even need things, but if you have no money and insufficient income you have to do without. Those who control the purse strings in Washington today don’t go without anything anymore. Despite the worst economic recession since the Great Depression, Congress continues to spend and tax and spend and borrow.

I thought that Barack Obama promised that we wouldn’t use the creative math that Bush’s Administration adopted to fund his wars off the books so they wouldn’t inflate the official deficit. But the Democrats have their own recipe for cooking the books doing the same thing in their health care bill. No change.

There are some good things in the House health care bill, but I don’t think that the economy can stand the additional spending for the entitlement created. The Congressional Budget Office says that the bill would cost $1.05 trillion over 10 years, not the $829 billion claimed by House Democrats.

To get that low the WSJ says, “the House disguises hundreds of billions of dollars in additional costs with budget gimmicks. It ‘pays for’ about six years of program with a decade of revenue, with the heaviest costs concentrated in the second five years. The House also pretends Medicare payments to doctors will be cut by 21.5 percent next year and deeper after that, ‘saving’ about $250 billion.

Obama Care will be lucky to cost under $2 trillion over 10 years; it will grow more after that.”

One of the most disingenuous features of the bill is that the tax hikes in it are not indexed for inflation. Without indexing for inflation, the $500K threshold for the health care surcharge tax declines to $250K in 20 years. It’s the same for the business payroll penalty for not offering health insurance. Each year more and more business will owe tax.

Remember the Alternative Minimum Tax? In 1969 when it was enacted it was only impacting 1 percent of taxpayers. Today families making $75K are paying AMT. The tax increase starts out only impacting the “rich,” but in 20 years a lot of taxpayers will be surprised in how “rich” they have become to owe these taxes because of inflation. They claim the bill won’t add to the deficit. That’s only because of the tax hikes. Democrats are spending more than Republicans, which is a tall order considering free spending precedents set by the previous administration. Democrats have been out of power and during that time there was stuff that accumulated that they wanted.

According to the WSJ, the Democrats’ shopping cart of items total $75 billion a year in permanent costs “until, well … forever.” Federal agencies will receive a 57 percent increase in appropriated funds from 2008-2010. Discretionary domestic spending increases 12.1 percent, compared to 6.4 percent by Republicans. The GOP Congress was by no means the fiscal conservatives that they claim to be today spending twice the rate of inflation.

This Congress is spending six times the rate of inflation. Yet, they are not getting everything that they want. Six times inflation is only where they have stopped to take a break. The Fed has infused the financial system with liquidity and the government is spending at an unprecedented pace as never before.

To pay for this a myriad of tax increases will slow private sector economic growth from what it otherwise would have been without them. This spending is difficult to reconcile with revenue without constant increases in taxes that are baked into the bills and more borrowing. For the Fed to accommodate this kind of fiscal policy is inflationary. The trajectory of government spending has to stop or eventually the wheels will fly off.

I recently commented that half of CBOT price discovery was fundamental and the other half was outside market factors. That balance of power has become even more skewed to outside market factors. The massive fiscal spending and Fed accommodation is re-inflating the economy and the investment sector is putting more money to work in commodities. November’s USDA soybean reports were very bearish, so much so that in a different economic environment prices would have been sharply lower immediately after release.

Mitigating support from outside markets has blunted bearish fundamentals. Gold has been making new highs, the dollar new lows. Sentiment on both may have reached extremes so corrections could occur but trends don’t change easily. CBOT markets have tracked outside markets so that new highs in gold, new lows in the dollar should be matched by new highs by CBOT markets too.

Fund buying has been very apparent after CBOT openings. They have orders to execute early in the day session. Then fund buying wanes, price gains fade mid-day. Two-sided trade can develop with lows typically made between 10:30 a.m. to noon before fund buying returns for the close or not. Funds typically spread new investment buying over three days.

Funds have been using 20-day moving averages as support and resistance points. Closes above or below the moving average trigger new waves of fund buying or selling. Fund buying is apparent throughout commodities often ignoring other fundamentals, focusing entirely on positioning for price inflation.

David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.

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