Who's Going to Bailout the U.S. Government? 13 comments
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CNBC anchor to his colleague: 'Dick, oh my God, you're not going to believe this, it's just come in on the wires. "US government to take over Goldman Sachs (GS)".
Dick goes pale, undoes his tie, and starts hyperventilating. 'It's over, the whole shooting match, we're cooked. I just can't believe it...it's the end of capitalism. Sell everything.'
'Wait Dick, just hold on there, they just issued a correction; now it says "Goldman Sachs to take over the US government'.
Dick recovers his composure. 'Jeez, you had me going there, so what they paying?'
Probably not a lot as it happens. The CBO has just forecast a $500bn US fiscal deficit for 2009; the current US national debt is $9.3trn or 64% of GDP and rising at a billion dollars a day. The CBO estimates a $2.3trn increase in national debt over the next decade, even before factoring in the GSE bailout (which will have to be consolidated in the national accounts). Interest payments are now the fourth largest Federal expenditure item; mandatory items like Medicare are well over half the total spend and this will grow rapidly as the dependency ratio rises (the number of social welfare beneficaries to tax-paying workers). PIMCO among others (and how they must be smiling after mugging the US government on subordinated GSE debt, $1.7bn is a nice payday) expect deficits to test $1trn within a few years.
And all these appalling numbers assume that the Bush tax cuts will expire in 2010; under a McCain administration they may continue; independent analysts expect the Obama tax cuts to cost $3trn over ten years and the McCain ones $4trn. What neither has the guts to tell the American public is that taxes will actually have to rise on that time frame, and the US will have no choice but to consume less, and save and invest substantially more. Wall Street, Detroit, and a queue of other other failing industries are looking to feed at the seemingly bottomless Federal bailout trough, but as I wrote in The People's Republic of America this will fatally undermine the ruthless dynamism of the US economy, its crucial comparative advantage over Asia and Europe.
Right now, America's greatest export is IOUs, container loads of which are shipped to China, Russia and the Middle East daily, but the GSE crisis was hastened by the dumping of agency debt by China in particular, and was a sobering indication of how the US is fast losing control over its economic destiny. The relative levels of government debt are less the issue than the fact that it can't be funded by domestic savings, unlike almost all other developed nations. At some point, sooner rather than later, there will be a funding crisis which will see yields spike higher, perhaps triggered by a likely spate of financial crises among US hedge funds and regional banks.
The chart below from PerotCharts.com summarises the deteriorating medium term fiscal outlook; anybody buying a 30 year Treasury at these yields had better have their eyes wide open (and their heads tested?).
Meanwhile, my skeptical view of the Fannie (FNM) & Freddie (FRE) bailout has proved correct; the US stock market is technically in very poor shape, and likely to replicate the crash we have seen in emerging markets and commodities, all down 30-50% from their peaks. We see 90% negative volume down days like the 280pt fall Tuesday, but on the rallies like the 290pt rise on Monday the positive volume balance is barely 60%; in other words, only the bear moves show conviction. As I've said many times before, I expect we will see a typical 30% peak to trough bear market before this is over, implying sub 1100 on the S&P and sub 10,000 on the DJIA.
I remain defensively positioned, being 100% liquid with puts on key indices 5-10% below current levels.
Disclosure: Long SPY put options at 10500 and 1000
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This article has 13 comments:
The BRIC countries will be very lucky if they can avoid large, stagflation crises.
The arrogance of the notion that Goldman Sachs - which depends on the ability to borrow at the risk-free GOVERNMENT rate is somehow going to bail out the government which supplies it with fiat capital is absurd.
What are they going to use for money? Gold?
Don't make me laugh.
Or is it the failure of the American people to demand a responsible government?
These quasi-elected people have financed an invasion / and costly occupation with bonds largely sold to foreign governments, and don't have the moral fortitude to raise taxes to pay the bills? Talk about a welfare state. They pacify the citizens by not even telling them the bills will come due, in some form -- either through taxes (are we grown up enough to handle that?), inflation, lower growth accompanied by lower real wages ... economic forces will extract the cost whether we like it or not.
Our government has chosen to let hundreds of billions fly out the door each year to flood the coffers of other governments, mostly unfriendly ones. That's real wealth leaving out country. We're thirty years behind in heading off that mess, which could have been solved by now with intelligent use of resources and responsible actions, along with foresight and real leadership.
The Roman state lasted much longer before it collapsed under its own weight. We stilll have choices. The American people could still learn to act like grown-up responsible people. Instead we demand our leaders treat us like soft, spoiled brats. Will we continue the slide?
Answer: Only God provided we (leaders and people) humble ourselves before him and ask for forgiveness for the mess we have made.
As Thomas Jefferson once said: "When all government, domestic and foreign, in little as in great things, shall be drawn to Washington as the center of all power, it will render powerless the checks provided of one government on another."
In summary, we are out of control and the worst fears of our founding fathers is coming to pass.
God help us.
Didn't think so. We re-elect 95% of these idiots and will continue to do so as long as the checks keep coming. When they stop, we'll find somebody else to provide "stimulus".
Obama seems like a nice young man, but he has not guts to do what needs to be done because he's in the wrong party. McCain has the guts, but not the smarts or stature. He'll end up fighting everybody and accomplish nothing but some investigations into corruption.
Meanwhile, the ship is buring to the water level.
Solution: Live your life (financially) like you don't trust ANYBODY in Wall St or 1600 Pennsylvania Avenue (Washington). Then, and only then, you have done all you can do.
One more thing. BUY (and take PHYSICAL POSSESSION of) as much gold and silver you can get your hands on. Put it in a safe and wait.
Lastly, may God help us!