Showing posts with label deficit. Show all posts
Showing posts with label deficit. Show all posts

Monday, January 12, 2009

Last Nail in the Coffin

Last Nail in the Coffin by Martin D. Weiss, Ph.D.

The government has just released one of the most shocking federal budget reports of all time.
Even if you overlook the gaping holes in their economic assumptions, it's obvious the federal deficit is going to deliver a punch below the belt of the economy.
And once you unveil the shaky assumptions, it's equally obvious the deficit could be the last nail in its coffin.
First, Look at the Government's Own Shocking Numbers!
The Congressional Budget Office (CBO) estimates that ...
The 2009 federal deficit will be $1.186 trillion! Even after adjusting for inflation, that's more than the combined cost of the Vietnam War ($698 billion) and the Korean War ($454 billion) ... 4.6 times more than the entire S&L bailout of the 1980s ... and 5.5 times larger than the Louisiana Purchase:
In sheer dollars, the 2009 federal deficit will shatter every record deficit of every nation in history.
Even in proportion to the larger U.S. economy, the 2009 deficit will represent 8.6% of GDP — more than four times the average under Bush, nearly seven times the average under Clinton, and 1.4 times the post-World War II record of 6% under Reagan.
After you factor in the additional deficit spending and tax cuts proposed in the Obama stimulus package, the deficit will surge to 10% of GDP.
Federal spending will reach 25% of GDP — the highest level in American history outside of World War II. But during World War II, most of the money was spent on war-related production, creating entire new industries and keeping millions of Americans in uniform or on the job. In contrast, most of the 2009 deficit spending will be for corporate bailouts, unemployment benefits, Social Security and Medicare.
Already, in the first quarter of fiscal 2009, the federal deficit has ballooned to $485 billion, an unprecedented increase of 353% compared to the previous year. If it continues to grow at that pace, it will make all the above estimates look small by comparison.
This is not a fictional scenario conjured up by a gloomy economists with a murky crystal ball. Nor does it represent a third-party diatribe against Democrats and Republicans. It accurately represents the actual numbers just released by the nonpartisan CBO on January 8.
Second, Take a Closer Look At Their Assumptions!
Beyond the traditional budgetary smoke and mirrors, here are just some of the holes in their estimates:
1. The CBO implicitly assumes that the debt crisis is largely behind us — no more big bank failures, no more GMs or Chryslers, no more international debt defaults and no Wall Street meltdown. But the very size of its own deficit projection — reaching 10% of GDP — makes that assumption highly questionable.
2. The CBO assumes that federal revenues will remain relatively stable at 17.6% of GDP, only slightly below the 18.3% historical average. That means there can be no depression, no unemployment disaster, no tsunami of corporate red ink and no plunge in federal tax revenues.
"Just make believe those events can never happen!" goes the rationale.
What about the government data showing that the unemployment disaster is already here? "Largely ignore that, too," seems to be the underlying theme.
3. The CBO assumes that the economy will recover after 2009, and the government will get most of its bailout money back. For the TARP program, for example, the assumption is that the cost will be only 25% of the total amount loaned or invested. The remaining 75%, it figures, will be paid or earned back.
In theory, perhaps. In practice, current trends show that the only realistic hope the government might have of recouping its original investment is by providing even more bailout money to sustain the companies it already has on life support.
At Fannie Mae and Freddie Mac, for example, portfolio losses are far larger than anticipated when they were first bailed out last year.Reason: Prime mortgages, which make up the bulk of their portfolios, are now defaulting at much higher-than-expected rates.
At Citigroup, the government has committed to an additional $20 billion on top of the initial $25 billion the bank received initially. Plus, Citigroup also has received a government backstop for up to $306 billion in loans and securities backed by mortgages. But here, too, the government's liabilities and losses are bound to be larger than anticipated.Reason: The bank's portfolio is stuffed with home mortgages, credit cards and other consumer loans that are highly exposed to surging unemployment.
We see the same pattern at AIG, General Motors, Chrysler and nearly every major corporation the federal government has bailed out so far: More good money after bad!
Ultimately, the government will either have to write off most of its bailout investments or wind up nationalizing the companies, draining more taxpayer money for a longer period of time.
Third, Consider theInevitable Consequences!
Based strictly on the official estimates of the 2009 deficit, any economist not on drugs must conclude that, in the coming months and years ...
The federal government will have to borrow more money than at any time in history ...
To raise that money, it will have to shove aside individuals, businesses, local governments and virtually all other borrowers, scooping up most of the funds available in the already-tight credit markets ...
By crowding out other borrowers, it will sabotage its own efforts now underway to restore private credit markets ...
It will put great upward pressure on interest rates — and ironically ...
It could bring on a new, more virulent debt crisis that deepens and prolongs the economic decline.
Fourth, Don't Forget the Big Impact This Can Have on You!
The official budget estimates are sending you the same message I've been giving you: You must brace yourself for America's Second Great Depression.
Any saver or investor who does NOT take protective action could be making a fatal mistake.
My recommendations are unchanged:
Recommendation #1. Keep as much as your money as safe and as short term as possible.
Recommendation #2. Despite the low yield, I recommend short-term U.S. Treasury securities for up to 90% of your money.
Recommendation #3. Despite apparent "bargains" now available in stocks and real estate, use any rally or recovery to get out of BOTH as fast as you can.
Recommendation #4. Don't dump your assets at any price. Sell in a deliberate, disciplined pattern. But do not delay! The time to move to safety is right now.
Recommendation #5. Learn how to build up an alternative source of profits and income, a core subject of our emergency briefing this coming Thursday at noon Eastern Time. Click here to sign up.
Good luck and God bless!
Martin
About Money and Markets
For more information and archived issues, visit http://www.moneyandmarkets.com
Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Tony Sagami, Nilus Mattive, Sean Brodrick, Larry Edelson, Michael Larson and Jack Crooks. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Kristen Adams, Andrea Baumwald, John Burke, Amber Dakar, Michelle Johncke, Dinesh Kalera, Red Morgan, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau and Leslie Underwood.
Attention editors and publishers! Money and Markets issues can be republished. Republished issues MUST include attribution of the author(s) and the following short paragraph:
This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.



Millions of Loans Modifications ComingHundreds of thousands, if not millions, of loan modifications may be soon under way. The government is considering a plan that would help 3 million homeowners avoid foreclosure. The plan would include loan modifications that would lower their interest rate for five years. According to the Mortgage Bankers Association, more than 4 million homeowners were at least a month behind on their mortgage in June and 500,000 had started the foreclosure process so some type of plan is desperately needed. Some banks have already started allowing borrowers to modify their existing loan. JP Morgan announced last week that they are starting a new program to stem the number of foreclosures and they will not put any homes in foreclose for the next 90 days while they implement the plan.JP Morgan's program will also include Washington Mutual and EMC clients, which they acquired earlier this year.Bank of America will start loan modifications Dec. 1 that are expected to cover about 400,000 loans previously held by Countrywide.I look forward to the help borrowers will receive under these loan modifications.

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Friday, January 09, 2009

Biggest flood of red ink the world has ever known

The biggest flood of red ink the world has ever known by Mike Larson

How much is $1.186 trillion — or $1,186,000,000,000, written out the long way?
• It's more than the inflation-adjusted cost of the Vietnam ($698 billion) and Korean Wars ($454 billion).
• It's more than the Louisiana Purchase ($217 billion) and the Savings and Loan bailouts ($256 billion).
• It's greater than the 2007 Gross Domestic Product of all but 13 other countries in the world.
• It's equal to $3,881 for every man, woman, and child in the U.S.
• It could buy 189,760,000,000 bushels of wheat at recent prices. 26,893,424,036 barrels of oil. Or 1,581,333,333,333 cans of Diet Coke at my trusty vending machine in the break room.
Why do I bring this up? Because that $1.186 trillion figure is the projected 2009 deficit, according to the latest report from the Congressional Budget Office (CBO).
And it is downright scary.
These Numbers Are Big — Really Big!
That $1.186 trillion is such a large number — so out of control — that it's hard for most of us mere mortals to process it. Suffice it to say ... It's the biggest flood of budgetary red ink any country has ever seen in world history. And it makes last year's $455 billion deficit look like chump change.
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It's not just the absolute number, either ...
The projected 2009 figure is equal to about 8.3% of U.S. GDP. That tops the post-World War II record of 6% set in 1983.
Still not worried?
Then get a load of this:
The CBO estimate doesn't even include any potential stimulus package from Congress and the Obama administration.
We haven't gotten the final details of the stimulus plan. But it could cost anywhere from $675 billion to $1 trillion. That means the ultimate 2009 deficit could end up being larger by 60% ... 70% ... 80% ... or more!
Is the red ink a short-term problem, one that will soon go away? Not according to the CBO. Scroll through the agency's report — "The Budget and Economic Outlook: Fiscal Years 2009 to 2019" (available at: http://www.cbo.gov/ftpdocs/99xx/doc9957/01-07-Outlook.pdf) and you'll come to a nifty table on page 23.
It projects red ink as far as the eye can see: An ADDITIONAL $3.135 trillion from 2010 through 2019.
Source: CBO
Two possibilities could bail us out of this black hole of debt:
Congress and the incoming administration could really clamp down on spending going forward to stem the tide of red ink.
Or the stimulus plan could manage to completely offset all the credit, real estate, and economic problems, thereby leading to a windfall in tax receipts.
Both are highly unlikely ...
And if neither scenario comes about, this country's finances are going to be blown to hell for years and years to come.
Consequence-Free Borrowing Forever?Not Bloody Likely
Now if you're the type of person who believes consumers, corporations, or even sovereign nations can borrow money they don't have ... and spend far beyond their means ... for all eternity, then you can stop reading right now.
The amount of money Obama will need in 2009 scares the bejeezus out of me.
There's absolutely nothing to worry about.
But if you're like me, and you think numbers like $1.186 trillion are so far off the charts that they HAVE to have consequences, then you should be downright scared!
The government is already selling record amounts of debt at auction, day after day, week after week.
This week alone, Treasury sold $8 billion in 10-year TIPS and $24 billion in four-week bills on Tuesday ... $30 billion in 3-year notes and $35 billion in 70-day cash management bills on Wednesday ... and $16 billion of nominal 10-year notes on Thursday. And there's no end in sight.
Total net issuance could approach a mind-boggling $2 trillion by year's end!
At some point, investors are going to balk at all this issuance. They're going to choke on the massive amount of U.S. paper spilling out of Washington. They'll demand higher yields to buy our debt, driving bond prices down and interest rates up, just as I warned in my December 5, Money and Markets column, "The Biggest Bubble of All: Long-term Treasuries?".
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Heck, the day of reckoning could already be upon us ...
Thirty-year Treasuries plunged more than 3 points on New Year's Eve ... another 2 30/32 on January 2 ... a whopping 5 16/32 on January 5 ... and another 1 28/32 on January 7. They've lost almost 13 points in a virtual straight line, while yields on 10-year notes shot up from 2.25% to 2.5%.
My advice remains the same: Short-term Treasuries are fine as a place to park your keep safe money. But stay the heck away from long-term U.S. debt.
Until next time,
Mike
About Money and Markets
For more information and archived issues, visit http://www.moneyandmarkets.com
Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Tony Sagami, Nilus Mattive, Sean Brodrick, Larry Edelson, Michael Larson and Jack Crooks. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Kristen Adams, Andrea Baumwald, John Burke, Amber Dakar, Michelle Johncke, Dinesh Kalera, Red Morgan, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau and Leslie Underwood.
Attention editors and publishers! Money and Markets issues can be republished. Republished issues MUST include attribution of the author(s) and the following short paragraph:
This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.




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