Kass: Dousing the Fire With Kerosene

This blog post originally appeared on RealMoney Silver on Aug. 3 at 7:59 a.m. EDT.

"The balance of financial terror ... is a situation where we [in the U.S.] rely on the cost to others of not financing our current account deficit as assurance that financing will continue."

-- Lawrence Summers

A burgeoning fiscal deficit and the financial instability of our state and local municipalities are among two of the most significant of a number of nontraditional headwinds that consumers, corporations and investors face in the future. Though the bulls generally agree with these intermediate-term challenges (especially the spiraling deficit and a nervous U.S. dollar stalemate), they generally dismiss them both over the short term, favoring the belief that the current upside surprises in earnings will dominate the market landscape in influence.

I would argue that the aforementioned challenges are ever more predictable in consequence and will serve as a governor to further gains in market valuations. Not only are they inhibiting but they are also potentially oppressive influences that have been too readily put on the back burner in the face of a relentless market advance over the last five months.

An avalanche of spending by the public sector is now following an avalanche of spending by the private sector. In essence, we are (perhaps necessarily) fighting the slowdown with the same sort of incendiary kerosene that put us into the mess.

Profligate spending comes at a cost, a cost that we will experience sooner than later.

It is only a matter of time before policy makers address the financing of this accumulated debt and "the great reflation experiment of 2009" by raising taxes significantly. Over the weekend, we have already begun to witness the start of what is likely to become an avalanche of changing tax policy.