Red Rover Come Over

The AIG bailout got expanded this week by at least 40 billion or so. A couple more big banks went bust last Friday. GM and Ford are both going to get at least 50 billion and it won't save either one, only delay their demise. They will get more before that happens. The government is now formulating a plan whereby it will backstop banks if they decrease the amount owed on individual mortgages commensurate with the mortgaged properties current market value. We know that the FDIC will soon need hundreds of billions to keep funding insurance deposits as banks fail. The banks remaining extant will continue to need huge infusions of liquidity as stocks and bonds sell off. The government will continue to need to buy huge blocks of bad debt from financial institutions that hold it. The States are starting to go bankrupt as revenues dwindle and expenses rise. They do not have the privilege of issuing debt and printing money ad infinitum. They are going to demand bailouts, just like financial institutions that are already receiving them. California, where I live, could go trillions in debt, over the next few years. All the other States are in the same boat and most of them, unlike California, already receive more revenue from the Federal government than they contribute.

In the meantime, as the economy worsens and unemployment rises, Federal tax revenues will shrink, whether taxes are raised or not. People eligible for social safety net entitlement benefits are going to be increasing dramatically, as well as additional job creation and economic stimulus programs. Public works programs may build up the infrastructure in the long term and benefit the economy for generations to come but the dollar cost will be huge now. The military continues to run up huge bills the government can't pay. It is likely that the government will even increase military manning levels, as a way to address rising unemployment.

The current national debt is 11 trillion. It will be 22 trillion in less than 2 years, maybe a lot less. It will likely be in the 50 trillion dollar range by the end of President Obama's first term. I have no reason to believe that the economy will be better in 4 years. It likely will be worse, with much worse yet to get. The current level of debt, 11 trillion, at today's dollar valuation is not serviceable by our government, even in an expanding economy and the kind of moderate inflation we have been experiencing over the last 50 years.

How long will foreign entities continue to buy and hold American debt? They have problems of their own. Big problems. The Chinese people are used to eating. They are going to continue to want to do so. If their government wants to stay in power, it will make sure it feeds them. The Europeans have their own financial institutions to bail out and a fragile European union to maintain. The Indians and Africans are a long way away and don't have much leverage against us but they are going to be unhappy as hell. The Arabs have as much of our money as they are ever likely to need. South Americans feel they have been working for the Yankee dollar long enough. I don't see a market for 40 trillion or so in American debt, internationally, over the next several years, do you?

Some interesting things are likely to happen soon.