Wednesday, September 24, 2008

The Ultimate Trillion Dollar Question

So deadly I wonder if few dare to even ask it?

Can these massive bail outs cause the United States to default on it's own debt?

There. I said it.

Honestly I don't know the answer but it is something I sure want answered. Otherwise it's like we have the bad uncle here, the gambling addict who we bail out and bail out yet he keeps ending up in Las Vegas only to be killed by a gang of loan sharks after we're out our life savings.

Is that scenario possible?

Let's find out.

Economists are now tallying up the numbers and estimating the effect of the latest bail out on the federal deficit and it ain't pretty.

Bloomberg is now reporting:
The plan, which asks Congress for funds to buy devalued securities from financial institutions, would drive the debt above 70 percent of gross domestic product and the annual budget gap to an all-time high, possibly exceeding $1 trillion next year, economists estimated.
Let's say that one again, 70% of GDP. That's gross debt, total debt.

But does that mean the United States defaults like the 3rd world country we really are?

According to economist Richard Felson the answer is the United States will be able to stay afloat but at a great cost.

He says inflation will increase, the dollar will fall and any sort of other function the United States normally provides, ya know, things like health care or infrastructure rebuilding, the U.S. would not be able to afford.

The New York Times blog is more conservative with a Federal 6% ratio to GDP...increase. It was currently estimated about 3.6% of GDP.

The Financial Times is reporting there is a group betting the US would actually default on it's debt.

One frightening fact in this article is foreigners hold 20% of GDP of US government securities.

Seeking Alpha is now talking about hyperinflation in terms of stock recommendations!
Hyperinflation is a devastating phenomenon. It wipes out the middle class by destroying the value of cash, savings, bonds and other paper instruments. But, how does it affect stock markets? With the Federal government just having added $5.2 trillion in Fannie/Freddie liabilities of which about $600 billion will likely default, the Federal Reserve having now polluted its balance sheet by some $700 billion worth of toxic mortgage bonds with a 41.6% default rate ($291 billion in likely defaults), an $85 billion bailout for AIG, and, now, the Administration asking for some $700 billion more to bail out financial firms, it seems clear that the winds of hyperinflation are upon us.
Where is the CBO or GAO on all of this? One would think we would have an immediate report.

It appears the results are currently impossible to predict.
As the U.S. government embarks on a financial-rescue mission - whose cost is impossible to predict - the nation is already headed for a sustained period of budget deficits on a scale never seen before, said Peter R. Orszag, director of the Congressional Budget Office.
Many are also predicting more and more going begging to foreign governments which also implies payments would become a major US export and debt the import..

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