Saturday, December 17, 2011

Increasing Political Gridlock Ahead

There existed the possibility that the Republicans and Democrats would briefly have a reluctant willingness to compromise during the last part of Minor wave 2 up as positive social mood results in compromise and consensus. We are indeed seeing a last willingness by Republicans and Democrats to compromise on government spending before "The Great Deflation" starts unfolding in full force.

It is significant that President Obama only managed to garner an agreement in Congress for a 2 month stopgap extension in extended unemployment benefits and a payroll tax cut in spite of over a month of hardcore campaigning on the payroll tax extension issue. This is in strong contrast to December 2010 where President Obama managed to hammer out an agreement for extended unemployment benefits and a payroll tax cut to be extended for a full year (all of 2011). The reason for the difference in outcome has to do with the social mood trends -- in December 2010, we were still in Primary wave [2] up, so the social mood at that time made it easier for President Obama to hammer out a deal with the GOP. We are now almost 8 months into Primary wave [3] down, and positive social mood at the peak of Minor wave 2 up (within a much larger Primary degree decline) was never going to achieve the lofty levels that were reached at the peak of Primary wave [2] up.

The difference in outcome between now and December 2010 underscores a fundamental aspect of bear markets -- as bearish social mood increases, so does strife and discord in the political arena, making it progressively harder for politicians to compromise and reach an agreement on various issues.

The next extension will go for a vote in Congress in late February 2012. By then, Minor wave 3 down will be well underway. Here is a chart of the DJIA with the events labelled:

When the next vote takes place, we will be in Minute wave [iii] of Minor wave 3 down with the Intermediate degree point of recognition close at hand. Given the bearish social mood that will be present at that time, there will be too much strife and discord to make any type of agreement possible, effectively putting an end to the payroll tax cuts and extended unemployment benefits on March 1, 2012. With Congress also due to hammer out a federal budget around that time as well, the strife and discord in the political arena due to bearish social mood will make a government shutdown with a duration of several months a virtual certainty as Republicans refuse to budge on protecting the tax cuts for the top 1% and Democrats refuse to budge on raising taxes on the top 1%.

With Minor wave 3 down on the horizon, one of the defining characteristics of 2012 will be increasing political gridlock as the Republicans and the Democrats become increasingly stubborn, ultimately resulting in a federal government shutdown lasting several months.

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