Just How Much Can the U.S. Government Guarantee? 26 comments
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There are irregular miracles from God, the Creator of all, but there is no magic. The US government can step forward and say, “We guarantee the liabilities of Fannie (FNM) and Freddie (FRE), and take control of the companies.” But who guarantees the US government? In the economic world, there is always a cost for every action.
Yes, the US government will continue to borrow from the Saudis and their allies, who appreciate our military actions constraining their Shi’ite adversaries, and supporting their own regimes. China wants to continue to “grow,” and they don’t care if they are paid back in “funny money” for now, buying Treasury securities with excess dollars.
The US Dollar rallied yesterday, even as the government absorbed liabilities that are uncertain as to size, even though I think the eventual cost will be less than $200 billion.
Who doesn’t want to be guaranteed by the government? The auto companies are in line, can I get in line too? I could do amazing things with a $50 billion credit line from the government. I would assemble a small empire of undervalued companies with earnings yields higher than what I would have to pay Uncle Sam in interest.
My point is this: When you take into account the structural deficit, funding for the wars, social security currently on the balance sheet (but not its increase in liabilities), Fannie and Freddie, and future demands for bailouts of homeowners and auto companies, where does the bailout stop? Where does the willingness of foreigners to buy Treasury debt end?
I don’t know, and this is the biggest question facing the global debt markets now. A century from now, a fellow resembling James Grant will write several popular books explaining the decadence of the era, and how the US squandered its leading position in the world by borrowing too much.
So, call me skeptical of the US Dollar and Treasury rallies. Those should reverse soon.
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This article has 26 comments:
Americans can only elect what they're allowed to. Americans can only make decisions on the information they have available. Our doom was sealed when the media became a tool. This is simply the consequence of decisions made long ago to base the world's economic system on the fiat US dollar. The media and the political class became means of control to keep that system in place. As recent events plainly reveal, it's all run by the big banks.
Let someone else have their turn being the world's reserve currency. It's an "honor" I don't want anymore, now that I understand it. Bring the army home, let someone else guard Europe and keep the oil flowing, like maybe the Europeans.
Look what happened to Ron Paul's candidacy: ignored and ridiculed by the MSMedia, he was the only one in the race telling Americans the truth. No one wants Americans to hear the truth, at least not until the bankers have finished raping the country.
There is very little upside left in these securities and the risks you point out are being ignored entirely. We may be coming up on the dollar exit point a lot of us were hoping we'd get, and I suspect much of the forex market intervention we've been seeing is an attempt by the Bush administration, with help from others who will benefit from the dollar bounce, to prop things up in an effort to help McCain. (I ain't politicking - if a Democrat were in office he'd be doing it to help Obama. Just the way it is.) When that ends, it is hard to believe holders of 7-to-30 year paper will see much point in 3-4% returns denominated in a weakening currency with poor fundamentals and backed by a government with a serious spending problem. The spike in yields could be quite dramatic and I expect to see the current trend stall out and then reverse over the next 3-4 months. Anyone with any inclination to short government debt should be entering or growing here with plans to fill out the position over time. For technical traders, confirmation of the double top should mark a great opportunity, probably early next year although an Obama victory in November might provide the catalyst.
Long PST TBT, short various long-dated Treasuries.
Has anyone done any estimates on how much this recent bailout could cost the taxpayer under a number of different scenarios? For example, if national home prices level off, drop another 10%, etc?
The market rallied on relief but this relief has the potential to turn to fear if the home prices are not at or near a bottom which seems to be the general Wall Street consensus...
You are such a fool. The funny thing is I read that the Bush administration has engineered the fall in oil prices as well to help McCain.
You should read a little about the history of government intervention in the currency market. The effect is short and never this dramatic. And even if this was what they were planning, why would they keep it secret? It would be in their interest to let the public know about the intervention, because just the news of the government intervening would lead the dollar higher.
The reality is that the dollar has been greatly undervalued against the currencies. Remember those other currencies are also fiat currencies (so is every currency in the world) and they too print their money and borrow and are facing deficits. In fact, Europe and UK might be faced with a more severe slowdown than even in the US. So, relative to their currencies, the dollar is undervalued and its rally is more than justified.
The treasury is undoubtedly little more than a mechanism of power collection and consolidation at the expense of many to benefit the strikingly few.
What incentives do I have to change and earn more than I spend? NONE.
As an opportunist, I can't see why other nations aren't considerably more bold and aggressive, particularly with the shell games we're playing concerning risk, leverage, and utter protectionism of the elite.
We are ripe for the pillaging, with the only hindrance being that we're filled with little more than endless Chinese junk.
How long will foreigners willingly do this? Forever. They are risk averse and our custodianship of capital and respect for the property rights of creditors dramatically exceed what is available in either respect anywhere on the planet.
The silly commentators pretending dollars are "funny money" or not real are welcome to try to get through the next year passing their own script without repaying any of it.
The willingness of the government to dramatically upset existing financial arrangements and to bankrupt politically connected shareholders with billions in prior capital values, at institutions like Bear and Fannie, entirely to protect senior creditors, are the precise reason dollars are not funny money but real wealth, and dollar denominated debts the safest investments on the planet. Every other society on earth would have stolen from creditors instead.
Meanwhile, we hear endless carping against Wall street and US finance generally, while no one raises a peep against the deadbeat borrowers who started it all. The banks and major US financiers are precisely the honest men making their creditors whole at the cost of their own fortunes, after being stiffed by those deadbeats. Yet the honest ones get all the brickbats, while the deadbeats sing "oh dearie me, I couldn't possibly pay this, just because I signed for it", and whine for handouts.
The degree of hatred for modern capitalism shown on this site and throughout the contemporary financial press is nothing short of sickening. You should all be ashamed of yourselves.
FNM + FRE bondholders are atomic-bomb-holders too, so they said thanks. There is a lot more supply of greenpaper this week, and rsik aversion is growing, so more demand too, so no shame at the end of the day, just more powder for bondholders...
That is a brilliant comment, whether spoken honestly or in a satirical form.
This is directly inflationary.
Think about it, if the government has taken over all this debt, and the only way that the government can guarantee that people don't default on their mortgages is to make their house worth "more", what will the government do?
This is a back door into causing inflation and yet the dollar is going up. I just love our goofy, and manipulated markets!
Jason is right as usual. The dollar is far away the best currency.
The pound sterling was too.
You haven't looked at monetary history, have you? None of you dollar bulls are. So much the better.
Decision by the sovereign governments and foreign investor to allocate investment capital(dollars) ,to the U.S assets is purely economic decision.
Yest ,most countries in the world owe the U.S part of their existance.
WWI or WWW II anyone?. Would Russia survive German onslaught without the American second front.
In more recent history ,would population of Kosova survive the more recent terror without the American committment?-they dont think so .All said and done, that is what I have been told in the meeting with thei government of Kosovo.In fact as an expression of gratitude there are pictures of Wesley Clark on every highway from South to North.
Even country like Albania respects the U.S willingness to help.In fact Prime Minister Berisha had told me that if the U.S were not the first country to recognize Albanian independence ,then Albanian history may have been defferent.
Yes,U.S and the Americans are magnanimous and just .
That did not prevent the Saudi Arabia from imposing the oil embargo in 1973 ,inflicting severe economic pain on our economy.
Let's not hear anymore about the foreign charity .
The foreign decisions are purely economic in nature .All the foreign goverrnments are "stealing" the most relative value assets in the world -the U.S assets.
We as a country have addressed our commitments and will continue to do so.
All of the outstanding economic/market issues are being addressed.
The U.S economy /market are on the way to a record rebound -period.
It's as if two people were falling out of a building, and the guy who just passed the 45th floor asks the guy passing the 46th floor to pull him up. We're all headed to the same place, only the U.S. is moving slightly slower. Maybe because obese people have greater wind resistance.
Assets = Liabilities + Equity
In this case, the government is the asset. The liabilities are the government debts owned by foreign creditors. The equity is owned by taxpayers.
In recent years, liabilities have skyrocketed as the government has become more and more dependent on foreign capital to function (fight wars, pay entitlements, pay interest on debt, etc.). Meanwhile, taxpayer's equity has declined in proportion to the increase in liabilities.
Because foreign creditors (liability owners) now have a greater claim to the government (assets) than taxpayers (equity owners), we cannot be surprised that decisions being made by the government are now more for the benefit of the creditors than the taxpayers. It is basically the same process that a company in bankruptcy goes through. Owners of liabilities are paid first. Equity owners get what's left, if anything.
In addition, the ability of the government to function depends on continued capital infusions from foreign creditors, who can threaten to stop the flow of money on which the enterprise depends. Taxpayers, on the other hand, have no such leverage.
Now that we've figured out what is going on, we might be able to figure out what happens next.
"The US as a whole is indeed borrowing at very low rates and investing in more profitable assets. Our net worth is not decreasing as a result of our present indebtedness. US household sector net worth is $57 trillion, up double digit trillions since 2001, far exceeding the net new debt taken on over that period. Which is precisely borrowing at low rates to carry assets that in the long run will outperform that debt."
Which assets are these? Inflated home prices? What's your source? The whole problem is that Americans have been borrowing at record rates and consuming foreign produced goods, including oil, and buying houses at far higher prices than they are worth. This is due to Bush's ownership society propaganda machine which encouraged every American to leverage himself up to the hilt to buy an expensive house he doesn't need 90 minutes away from his low paying job. Now that the house prices are imploding that paper wealth number you write will evaporate and leave us with nothing but the bill.
"How long will foreigners willingly do this? Forever. They are risk averse and our custodianship of capital and respect for the property rights of creditors dramatically exceed what is available in either respect anywhere on the planet."
Foreigners will do this until they either wise up or bankrupt their own country supporting our spending habits.
"The willingness of the government to dramatically upset existing financial arrangements and to bankrupt politically connected shareholders with billions in prior capital values, at institutions like Bear and Fannie, entirely to protect senior creditors, are the precise reason dollars are not funny money but real wealth, and dollar denominated debts the safest investments on the planet. Every other society on earth would have stolen from creditors instead."
No, the reason they protect senior creditors is because they will determine the future of the US currency. With trillions of dollars sitting in reserve accounts overseas, the Asian central banks could crash our currency with the click of a button. Paulson's recent bazooka blowout will appease them for a while. But what are they going to buy with their reserves?
"Meanwhile, we hear endless carping against Wall street and US finance generally, while no one raises a peep against the deadbeat borrowers who started it all. The banks and major US financiers are precisely the honest men making their creditors whole at the cost of their own fortunes, after being stiffed by those deadbeats. Yet the honest ones get all the brickbats, while the deadbeats sing "oh dearie me, I couldn't possibly pay this, just because I signed for it", and whine for handouts."
These deadbeats were brainwashed with Wall Street and government propaganda saying that the only way to true wealth was to own a home, a depreciating asset. Most Americans rely on the government to protect them from things they don't understand (which is in of itself a huge problem), so they naturally heeded the media's siren call of fabulous wealth with no down payment. Most American's aren't even taught how to balance a checkbook, much less read the fine print on an option ARM.
"The degree of hatred for modern capitalism shown on this site and throughout the contemporary financial press is nothing short of sickening. You should all be ashamed of yourselves."
We don't hate capitalism, we hate socialism for the rich. You're a good writer, and this obfuscates some of the blatantly ridiculous points you're making.
At the base of a mountain, on the pristine cool Lake of Risk we have a canoe with three guys (and a cooler), Jason is a banker, the other, Henry, works for the treasury. The last man, Steve is the prudent, moderately risk-averse, middle class, long term investor.
Jason, (using his Panther Martin #6) gets firm jerk on the line!
Realizing that he's got a huge fish (in this example, aggregate cheap credit customer) he stands up to enthusiastically position himself to real the "hog" in.
Reacting to Jason's excitement, Henry jumps up to offer Jason a hand, grabs the net and leans out in the water after the fish.
Now, Steve, sitting on the other side of the canoe, out of reach of Jason's catch sits there, and tries to steady the boat -- however because of the enthusiasm of the other two standing up with all their attention on the fish, the boat tips over on Risk Lake and the fish gets away.
The moral (as this investor sees it) is that its not worth tipping the boat for one fish, even though it's not as fun-- and what capitalist fisherman lets the big one get away!?
Realizing that all of us are in the same boat, rather than pick apart differences, we need to all realize that all fishing and its not worth getting submerged in risk over a silly fish.
So... where are the life jackets?
The truth is, we are a nation of inflated assets; a nation with decreasing production of goods and materials over the last thirty years. We'll soon see exactly how over-inflated.
As for the "carping against Wall Street", give me a break. I've gone on record many times arguing that lenders and borrowers are equally culpable. Both knew they'd be bailed out by savers with guns held to their heads and both were proved correct. Wall Street is not the enemy; it does what it can get away with, same as anyone else. I don't begrudge them to right to try it, but I do begrudge them the right to succeed. Deadbeats and sharks should all be lined up and shot, quite literally. A fair trial and mass execution with bodies hanged in chains in front of the Capitol would be just the thing to heal the nation. Only one problem: the condemned would be many, the judges few.