How Much Can the US Government Guarantee?
There are irregular miracles from God, the Creator of all, but there is no magic. The US government can step forward and say, “We guarantee the liabilities of Fannie and Freddie, and take control of the companies.” But who guarantees the US government? In the economic world, there is always a cost for every action.
Yes, the US government will continue to borrow from the Saudis and their allies, who appreciate our military actions constraining their Shi’ite adversaries, and supporting their own regimes. China wants to continue to “grow,” and they don’t care if they are paid back in “funny money” for now, buying Treasury securities with excess dollars.
The US Dollar rallied today, even as the government absorbed liabilities that are uncertain as to size, even though I think the eventual cost will be less than $200 billion.
Who doesn’t want to be guaranteed by the government? The auto companies are in line, can I get in line too? I could do amazing things with a $50 billion credit line from the government. I would assemble a small empire of undervalued companies with earnings yields higher than what I would have to pay Uncle Sam in interest.
My point is this: when you take into account the structural deficit, funding for the wars, social security currently on the balance sheet (but not its increase in liabilities), Fannie and Freddie, and future demands for bailouts of homeowners and auto companies, where does the bailout stop? Where does the willingness of foreigners to buy Treasury debt end?
I don’t know, and this is the biggest question facing the global debt markets now. A century from now, a fellow resembling James Grant will write several popular books explaining the decadence of the era, and how the US squandered its leading position in the world by borrowing too much.
So, call me skeptical of the US Dollar and Treasury rallies today. Those should reverse soon.
September 9th, 200812:34 am at
David, Watched “IOUSA”? This is Warrant Buffet’s Squanderville versus Thriftville playing out.
I am thinking of seeing to it that my kids will be fluent in Chinese language and intimately familiar with the culture. Their bosses will appreciate it.
September 9th, 200810:44 am at
“So, call me skeptical of the US Dollar and Treasury rallies today. Those should reverse soon.”
I agree David. Though it will take time. The govt will bail out more troubled institutions and choose hyperinflation over deflation. I think 2009’s trade is to short treasuries and that precious metals will eventually disconnect from the dollar trade and show their money value. There has to be side effects to all this garbage and I dont see how its supportive of a strong US dollar.
Notice how there are two new SHORT TREASURY etfs: PST & TBT
September 9th, 20085:19 pm at
Bailouts undermine my confidence in capital markets. How can anyone accurately assess risk when there is government intervention to this degree? Our guidance is to assess risk as 0–the government has vanquished risk, apparently.
Standard II(B) of the CFA Standards of Professional Conduct prohibits market manipulation. It’s too bad that the government is insolvent in fiscally and morally.
September 9th, 200810:35 pm at
Don’t forget the FDIC bailout.
September 9th, 200810:52 pm at
synchro — thanks, I forgot that… ugh. Other commenters, thanks, you are on target.