We’re working up to a big thought…
It begins with this item – barely reported in the mainstream press:
A Morgan Stanley economist says the US federal deficit for 2009 could go as high as $2 trillion.
Let’s see…there are the on-going wars in Iraq and Afghanistan…a $700 billion bailout plan…this year’s $500 billion deficit…falling tax receipts…more bank ‘recapitalizations’…
…and a simple, but irresistible humbug of modern political economy: if consumers can’t spend…and businesses don’t spend…and banks won’t lend…it’s all up to the government.
Every economist trained during the last 50 years believes it is government’s responsibility to ‘save’ an economy…to give it the juice it needs to keep operating…and to provide the demand necessary to keep it expanding.
It is a theory that goes something like this: usually markets of private businessmen, consumers and investors are all-knowing; sometimes they are just dopes.
Now is one of the dopey times – at least, that’s the theory. Investors, consumers, business – they’re all running scared. But there stands The Government…immoveable in its wisdom…unshakeable in its determination…and unflappable in a crisis. And now the feds must step in…checkbook in hand…truth and justice underfoot….bankruptcy ahead.
The feds must save the day. Everyone is counting on them. But what can they do – other than throw money around? And whence cometh this ‘money?’ Then can borrow it. But here’s the funny part. If they borrow money they do not increase the world’s supply of money by a single dime. They are merely taking it from one place – where, presumably, it performed some useful function – and transferring it elsewhere. Where? A banker’s vault perhaps. An insurance company’s reserves, maybe. Today’s news, for example, tells us that giant insurer AIG is back. After getting an $85 billion loan from the feds, AIG is looking for $38 billion more.
In effect, the feds put the US government’s full faith and credit on the line so they can borrow in order to lend…or spend. And the more they borrow…lend…and spend, the less the faith lenders should have in its credit. As faith declines, interest rates should rise. And rising rates will further depress the economy.
Borrowing – in a macro-economic sense – doesn’t really help anyway. It merely moves money around. What the world really needs is more purchasing power. More inflation, in other words. That is the ‘funny’ part that lies ahead. The ‘funny money’ part, to be more precise.
*** Yes, dear reader, Shareholder Nation took it on the chin last week.
And now, many are wondering whether America will be able to get up from the mat…
“Debt saps U.S. power,” says David Leonhardt in the New York Times. In effect, the US has spent money it hasn’t yet earned. Now, it must avoid spending so as to repay what it has already spending. This puts the nation at a huge competitive disadvantage, since it lacks the resources to fund new projects.
Our favorite columnist, Thomas L. Friedman, calls this the “post-binge world.” We read Friedman to get insights: not as to what is really going on; Friedman has no idea. But Friedman gives voice to popular prejudices; he tells us what the unthinking masses are yearning for.
And here it is:
“This workout promises to be painful, complicated and protracted,” he explains. No cause for panic, in other words. It will all be worked out. Then, he offers more reassurance, quoting the calming words of the world’s richest man:
“I have no idea what the stock market is going to do next month or six months from now,” said Warren Buffett on Friday. “I do know that the American economy, over a period of time, will do very well, and people who own a piece of it will do well.”
The Sage of the Plains did not reveal how he knows these things. Maybe he is right; maybe he isn’t. But here at the Markets and Money we’ve urged readers to panic out of US assets for a long time. And now, readers are advised to stay in panic mode…and sell into the coming rally.
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