he events of the past week are truly difficult to put into perspective. While the content of the proposed bailout of the American financial services sector are still being debated, pundits are already talking about hundreds of billions or even trillions of dollars of private debt being transferred magically into the ether of the US government and the American taxpayers. What does all of this really mean?
Well let's first keep in mind that the US government doesn't have any money to pay for this bailout. As of September 2008, the total U.S. federal debt was approximately $9.7 trillion and even before the current bailout the U.S. Federal Budget Deficit for 2008 was estimated to add another $400B. Some say the bailout may push this years deficit to over $1 trillion. And remember we are not even counting the costs of the wars in Afghanistan and Iraq or unfunded commitments to the Social Security Administration or Medicare which some estimate will contribute another $47 trillion dollars in mandatory obligations to future U.S. taxpayers. Currently $261 billion dollars of the $2.66 trillion dollar US budget goes solely to interest accrued on the existing national debt. And today the Bush Administration is asking once again for Congress to amend the debt ceiling to allow the debt to grow to $11.3 trillion. [1]
The bottom line is that we are headed back to dollar devaluation after a brief respite over the past couple of weeks as global capital ran for temporary shelter in dollar denominated assets. And as I have long predicted on this blog inflationary dollar devaluation is unavoidable in a country where neither the government nor the people are willing to live within their means. The price of oil and everything else that is priced in dollars will explode and interest rates will rise pushing the country back into the stagflation of the 1970's.
And what about the bailout? Forget about it. If the politicians actually managed to agree on some final terms the bailout is nonetheless doomed to fail at the primary order of the day--stabilizing home prices. This is because ex-Goldman Master of the Universe and currently Treasury Secretary Czar Henry Paulson is proposing to price the government's mortgage purchases through a reverse auction. In effect, banks will compete with each other to take the biggest haircut on their toxic mortgage portfolios in order to get the government to pick them first. Your foreclosed neighbor's reverse auction price will in effect become the market price for all properties in your neighborhood. If you haven't defaulted on your underwater mortgage yet you may as well.
Why are they doing this you may ask? I think it all goes back to that burgeoning $9 trillion dollar debt already on the books. The government appears to be terrified that if it appears we plan to screw all those Japanese, Chinese, Arab and UK investors out of billions of dollars in toxic Mortgage Backed Securities then maybe, just maybe they might become more reluctant to keep refinancing the still growing US National Debt. And who could blame them? I can't think of a bigger subprime mortgage than the one your government has taken out on you and your children's future.
Comments are closed for this post.
