Now wait…who is going to pay for these stimulus packages and bank bail-outs?

[Chuck Bao]

US stock markets are rallying on the news of stimulus measures being passed by Congress and a new financial bail-out scheme to be announced by the Treasury Department next week. I can’t argue against stock market rallies, but I am getting alarmed with how this all will be financed. That financing side seems to be getting downplayed in the rush to support a flailing economy.

Treasury rates have begun to rise and that will put a limit on how long interest rates in the US can be kept artificially low and essentially support the very weak housing market.

My take on all of this is that we will do it because we can, not because we should. Accountability is taking the back seat to political expedience. We will have to pay the piper eventually. It is either sharp retraction now or delayed recovery later. It just seems to me that we are now choosing delayed recovery.

http://www.bloomberg.com/apps/news?pid=20602007&refer=govt_bonds&sid=arTaefojfB_Y


U.S. Treasury to Sell $67 Billion in Long-Term Debt
By Rebecca Christie and Vincent Del Giudice

Feb. 4 (Bloomberg) -- The Treasury plans to sell $67 billion in long-term debt next week, revive auctions of seven- year notes and consider further steps to finance a record budget deficit as tax revenues collapse.

The government this month will issue seven-year notes for the first time since 1993, and plans to boost the frequency of 30-year bond sales, the Treasury said in a statement today on its quarterly refunding of long-term debt. Officials are weighing the “reintroduction or establishment” of other securities.

The increase in debt sales reflects the economic downturn, which has pushed tax receipts down 8.2 percent so far this fiscal year, and the cost of the government’s financial-bailout efforts. Financing needs are set to climb further as Congress debates a stimulus package in excess of $800 billion.

“The fiscal outlook remained challenging,” Karthik Ramanathan, head of the Treasury’s debt management, told the department’s Borrowing Advisory Committee of bond dealers and investors. He said the Treasury will seek to extend the average maturity and duration of its portfolio to reduce its dependence on short-term debt.

The Treasury plans to auction $32 billion in three-year notes on Feb. 10, $21 billion in 10-year notes Feb. 11 and $14 billion in 30-year bonds Feb. 12, the department said today in Washington. Seven-year note sales will start in February and occur monthly.

Deficit Forecast

Bond trading firms told the Treasury this week that they expect a $1.6 trillion shortfall in 2009 -- more than triple the record set last year.

“Treasury is expecting to make further changes to the auction calendar as a result of increasing financing needs,” the department said in a Feb. 3 presentation to bond dealers, released today.

In a Bloomberg News survey of six analysts, the median estimate predicted $32 billion in three-year note sales, $22 billion in 10-year-note sales and $15 billion in bond sales.

The Treasury is announcing a move from four 30-year bond auctions a year to eight. The department said it would sell a new bond every quarter with a reopening a month later. The Treasury said it is also considering adding a second reopening of 30-year bonds as well as the reintroduction or establishment of other securities.

Debt Capacity

Ramanathan said he’s confident demand will be sufficient for Treasury securities to keep borrowing costs contained. “Our debt-to-GDP ratio is low compared to other G-7 nations and we believe our capacity is quite high in terms of borrowing,” Ramanathan said at a briefing for reporters.

Discussions are under way with the Federal Reserve on the Supplementary Financing Program, in which the Treasury borrows on behalf of the Fed, Ramanathan said. When the Treasury sells bills at the Fed’s behest, it drains reserves from the banking system and makes the central bank’s job of controlling interest rates easier.

The Treasury has sought to phase out the program, which was announced in September, to avoid hitting the debt ceiling and to free up room on its auction calendar. Fed Chairman Ben S. Bernanke last month said he’d like to keep the program because it could help the central bank exit from the emergency actions taken to stabilize financial markets.

“We have not made a decision one way or another about how we’re going to proceed,” Ramanathan said.

Failed Trades

The Treasury has seen a “dramatic” decline in unsettled transactions, also known as failed trades or fails, in the last eight to 12 weeks, he said. “We have been pleased with what’s happening,” Ramanathan said.

Next week’s auctions of bonds and notes will raise $30.7 billion in new cash, the Treasury said.

This quarter’s total long-term debt sales exceeded the $55 billion in notes and bonds sold in November, when Treasury reintroduced the three-year note.

“The steps taken today will close the financing gap for the next few quarters,” said Stephen Stanley, chief economist at RBS Greenwich Capital Markets, who is predicting a $1.7 trillion budget gap this year. “The risks are skewed heavily toward a larger borrowing need, as the underlying budget situation is more likely to be worse than better.”

The Obama administration entered office facing the worst budget deficit on record, as a recession and credit crisis strain the country’s finances.

$2.5 Trillion

Government borrowing will probably reach $2.5 trillion during the fiscal year ending Sept. 30, according to Goldman Sachs Group Inc.

The Treasury’s advisory panel discussed the prospect of four-year, 20-year and 50-year debt with the Treasury, before recommending the addition of the seven-year note. Treasury officials declined to discuss 50-year bonds when asked about those discussions.

Ramanathan emphasized Treasury’s commitment to “regular and predictable” debt sales. Any future proposals would be fully aired so markets face “no surprises,” he said.

The Treasury said today it expects to reach the country’s debt limit of $11.3 trillion in the first half of this year.

The Treasury didn’t announce changes today to the Treasury Inflation-Protected Securities program of debt linked to consumer-price levels. In the advisory committee meeting, Ramanathan said TIPS would grow more slowly than the Treasury’s other debt because of studies that show they are a more expensive way to borrow, the minutes said.

TIPS Recommendations

In discussions with bond dealers ahead of the meeting, the Treasury asked for recommendations on how it made sense to continue the TIPS program. Several analysts suggested to the Treasury that it eliminate its five-year TIPS notes to focus more on 10-year inflation-protected notes.

Borrowing needs in the three months to March 31 will be $493 billion, compared with $368 billion predicted in November, the Treasury said in a statement in Washington. In the quarter that ended Dec. 31, the Treasury borrowed a record $569 billion, compared with $550 billion projected three months ago.

The U.S. posted a $485.2 billion deficit in the first quarter of fiscal year 2009, which started on Oct. 1, the Treasury said on Jan. 13. That surpasses the total shortfall for all of 2008, which came in at $454.8 billion, and puts the U.S. on track to set further records this year.

In today’s announcement, the Treasury said it expects to issue cash-management bills, “some longer dated,” during the current quarter.

[Chuck Bao]

I guess nobody is terribly interested as we appear to be intent on trying to use taxpayer money to spend our way out of this economic problem, pork and all. At least, financing it is pretty cheap for now.

But, watch out down the road if foreigners aren't buying so much and treasury yields start rising. We have already hawked our future and there will be nothing we can do about it.

The old saying is that a nation's central bank (in our case the Federal Reserve) has control over either interest rates or exchange rates, but not both. So, the increase in national debt to unimaginable numbers could mean sky high interest rates or a substantially lower dollar and inflation or a bit of both.

So my sidekick, the guy helping me write economic reports on Thailand, asked me yesterday if I really thought hyper inflation in the US was even a remote possibility.

While I was coughing up a lung, I managed to say <cough> not at all likely <cough>. Europe is in a bad of a mess as the US, unfortunately. And, Asia is getting hit the hardest with its reliance on exporting to the US and Europe.

The US dollar is still and will likely remain the international reserve currency by default.

So, we have this strange dance of everyone going down and national governments everywhere trying to spend their way out.

It is new and weird economics and all a bit mind boggling with the numbers.

Hyper inflation is relative to something, right? Maybe, the key is the first one to get its act together in like the least bit bad way wins.

My money is still on Asia, but politics is a wild card. Politics is the joker in the deck every and anywhere you want to play.

Personally, I would be a bit cautious in taking on personal debt unless you can afford higher interest rates. I would invest in the equities market only short term. I would throw rotten vegetables at economists who have nothing to say except long-term historic trends and stock market analysts who talk about long-term yields.

Oh, I’m not a US licensed analyst and you should take what I may say with a grain of salt or as it is, a stupid message board comment.

[Jerk]

Oh I'm interested. I just don't know what to say anymore.


The Treasury said today it expects to reach the country’s debt limit of $11.3 trillion in the first half of this year.Interesting.


Treasury officials declined to discuss 50-year bonds when asked about those discussions.

Interesting. Why?


We have already hawked our future

Yes, and the baby boomers are about to hit retirement.

[Chuck Bao]

Oh I'm interested. I just don't know what to say anymore.

I don't either.

I do know that the world is a pretty messed up place and average Americans don't seem to get that in a global context. Normal economics need not apply. Tax cuts yield exactly what? Protectionism is out. Try good money after bad?

Please mark my words on one thing, though. GDP is less and less defined by human labor. I think CNBC was trumpeting the productivity of the American worker. It may be true. It is also very top heavy and high tech and strangely skewed. Average Americans aren't getting the benefits. US corporate structure is getting thinner and thinner. You are either top level and get obscene pay and bonuses or you are worker class and getting a McD or Wal-mart job. That may be over simplifing it, but I think you get the point. Middle management has already been phased out by technology or exported to low labor cost countries. The retail sector is increasingly dominated by chains and not locally owned, operated.

[Jerk]

Let me ask you something, Chuck. Do you think an 'economic collapse' is possible? I guess I would define this as even worse than a depression.

I'm not so sure, myself, if it's possible, because people will always need to eat, live in shelter, and have transportation.

Another thing: if economics are 'zero sum' as some believe, then who is benefiting from all of this?

[royalfan5]

I think that until Americans wake up and deal with the fact that life isn't static, and that you can't keep things the way they are or where, people will just do what they think will maintain the status quo as best as possible and not really look down the road. But as longs other nations have a high enough savings rate to fund our pipe dreams, and a willingness to do so, it isn't something that is going to cross enough people's mind to do something about it.

[Chuck Bao]

Let me ask you something, Chuck. Do you think an 'economic collapse' is possible? I guess I would define this as even worse than a depression.

I'm not so sure, myself, if it's possible, because people will always need to eat, live in shelter, and have transportation.

Another thing: if economics are 'zero sum' as some believe, then who is benefiting from all of this?

Jerk, you are a very smart dude, clearly smarter than I am.

I do not see an economic collapse. An economic collapse would mean one thing - total failure in confidence in our banking system. The US government cannot allow that to happen and I've mentioned before that the TARP funds have to be used to inject money into the banks first and foremost.

How we go about that is in debate. We will see next week. The stock market is alreay anticipating restoration of confidence. Of course, the stock market is looking at anything short of nationalization as positive. Then again for shareholders, nationalization is their worst case scenario.

[Jerk]

Jerk, you are a very smart dude, clearly smarter than I am.

I do not see an economic collapse. An economic collapse would mean one thing - total failure in confidence in our banking system. The US government cannot allow that to happen and I've mentioned before that the TARP funds have to be used to inject money into the banks first and foremost.

How we go about that is in debate. We will see next week. The stock market is alreay anticipating restoration of confidence. Of course, the stock market is looking at anything short of nationalization as positive. Then again for shareholders, nationalization is their worst case scenario.

If I were smart I wouldn't have to work so hard to live a middle class life. Thanks, though, but really...I'm not. I can't see the big picture here. Only pieces of it. I'm hoping to find someone who does so I can listen.

[Chuck Bao]

If I were smart I wouldn't have to work so hard to live a middle class life. Thanks, though, but really...I'm not. I can't see the big picture here. Only pieces of it. I'm hoping to find someone who does so I can listen.

I know only the international perspective and that is not so much based on logic but short-term fund flows and spin, like the US stock market. I am being forced to hire someone to follow these stupid short-term market movements. Somebody on the ground reading this stuff already knows what's BS and what's not. Jerk, you've shown that you have a pretty good sense. I don't. My last trip to the US in December and everyone was like confident that we would score 50 points on Florida.

[Chuck Bao]

I think that until Americans wake up and deal with the fact that life isn't static, and that you can't keep things the way they are or where, people will just do what they think will maintain the status quo as best as possible and not really look down the road. But as longs other nations have a high enough savings rate to fund our pipe dreams, and a willingness to do so, it isn't something that is going to cross enough people's mind to do something about it.

That is precisely it.

Other countries are the enablers.

The shock of the US mortgage meltdown and where is the intervention?

Our drunkytown train has a few compartments for the rest of the world.

[Okla-homey]

:pop:


The Fierce Urgency of Pork

By Charles Krauthammer
Friday, February 6, 2009; A17

"A failure to act, and act now, will turn crisis into a catastrophe."
-- President Obama, Feb. 4.

Catastrophe, mind you. So much for the president who in his inaugural address two weeks earlier declared "we have chosen hope over fear." Until, that is, you need fear to pass a bill.

And so much for the promise to banish the money changers and influence peddlers from the temple. An ostentatious executive order banning lobbyists was immediately followed by the nomination of at least a dozen current or former lobbyists to high position. Followed by a Treasury secretary who allegedly couldn't understand the payroll tax provisions in his 1040. Followed by Tom Daschle, who had to fall on his sword according to the new Washington rule that no Cabinet can have more than one tax delinquent.

The Daschle affair was more serious because his offense involved more than taxes. As Michael Kinsley once observed, in Washington the real scandal isn't what's illegal, but what's legal. Not paying taxes is one thing. But what made this case intolerable was the perfectly legal dealings that amassed Daschle $5.2 million in just two years.

He'd been getting $1 million per year from a law firm. But he's not a lawyer, nor a registered lobbyist. You don't get paid this kind of money to instruct partners on the Senate markup process. You get it for picking up the phone and peddling influence.

At least Tim Geithner, the tax-challenged Treasury secretary, had been working for years as a humble international civil servant earning non-stratospheric wages. Daschle, who had made another cool million a year (plus chauffeur and Caddy) for unspecified services to a pal's private equity firm, represented everything Obama said he'd come to Washington to upend.

And yet more damaging to Obama's image than all the hypocrisies in the appointment process is his signature bill: the stimulus package. He inexplicably delegated the writing to Nancy Pelosi and the barons of the House. The product, which inevitably carries Obama's name, was not just bad, not just flawed, but a legislative abomination.

It's not just pages and pages of special-interest tax breaks, giveaways and protections, one of which would set off a ruinous Smoot-Hawley trade war. It's not just the waste, such as the $88.6 million for new construction for Milwaukee Public Schools, which, reports the Milwaukee Journal Sentinel, have shrinking enrollment, 15 vacant schools and, quite logically, no plans for new construction.

It's the essential fraud of rushing through a bill in which the normal rules (committee hearings, finding revenue to pay for the programs) are suspended on the grounds that a national emergency requires an immediate job-creating stimulus -- and then throwing into it hundreds of billions that have nothing to do with stimulus, that Congress's own budget office says won't be spent until 2011 and beyond, and that are little more than the back-scratching, special-interest, lobby-driven parochialism that Obama came to Washington to abolish. He said.

Not just to abolish but to create something new -- a new politics where the moneyed pork-barreling and corrupt logrolling of the past would give way to a bottom-up, grass-roots participatory democracy. That is what made Obama so dazzling and new. Turns out the "fierce urgency of now" includes $150 million for livestock (and honeybee and farm-raised fish) insurance.

The Age of Obama begins with perhaps the greatest frenzy of old-politics influence peddling ever seen in Washington. By the time the stimulus bill reached the Senate, reports the Wall Street Journal, pharmaceutical and high-tech companies were lobbying furiously for a new plan to repatriate overseas profits that would yield major tax savings. California wine growers and Florida citrus producers were fighting to change a single phrase in one provision. Substituting "planted" for "ready to market" would mean a windfall garnered from a new "bonus depreciation" incentive.

After Obama's miraculous 2008 presidential campaign, it was clear that at some point the magical mystery tour would have to end. The nation would rub its eyes and begin to emerge from its reverie. The hallucinatory Obama would give way to the mere mortal. The great ethical transformations promised would be seen as a fairy tale that all presidents tell -- and that this president told better than anyone.

I thought the awakening would take six months. It took two and a half weeks.

[email protected]

[Chuck Bao]

:pop:


Interesting, and then not.

Homey tell us how you really feel. Are you for stimulus and economic survival or not?

[Okla-homey]

Interesting, and then not.

Homey tell us how you really feel. Are you for stimulus and economic survival or not?

Reasonable stimulus fine. Nationalization of our economy and "not letting a good crisis go to waste" as an excuse for doing so, no.

[Vaevictis]

I'm interested. I'm still evaluating what's going on.

I don't think we need to ram this package through like Obama is pushing to do. I also think that the Democratic party is screwing up by laying pork on top of bacon on top of lard. And the Republican party is screwing up by repeating the mantra of tax-cuts-cure-whatever-ails-you, as it's pretty clear a large swath of the populace and economy is tired of that particular song. It reminds me of the old saying: If all you've got is a hammer, everything looks like a nail. Republicans need to go check their toolbox to see if they've got anything else stashed in it. (Democrats too -- social programs aren't the solution to everything either.)

Basically, it's one giant cluster-****. And I'm hardly surprised. I don't think anyone knows what to do, so people are doing stuff just to make it look like somebody's doing something. (Note that this is not without value, but I don't know that it's got $1 trillion of value in it.)

I think we are in or on the verge of a period of runaway deflation. Now I'm seeing reports of lenders not just being less willing to lend, but debtors being less willing to take on debt. People are socking away cash, and banks won't lend or can't find people to lend to. This has got to be murder on the money supply.

Understand that this is how it started in the Great Depression. This could get very, very bad.

There's one thing I think maybe we should look into, and that's forcing China to let the renminbi float against the dollar. I have begun to consider the possibility that China's manipulation of exchange rates may have lead to an investment glut in the USA, resulting in massive mis-allocation of capital. I'm not sure whether I fully subscribe to this notion yet, but I'm mulling it over.

[Chuck Bao]

Don't forget that China is in a mess too. They have had their own bubble economy with unreal expectations. What is the latest GDP growth number? 6%?

Chinese manufacturers have now started laying off factory workers left, right and center. The truth of the matter is that the Chinese government fears unemployment the most. Those who have relocated to the city for the factory jobs are not going to go back to the farm orderly or peacefully.

The truth of the matter is that the Obama administration will continue to treat China with kid gloves. With this powder keg there, affecting all of Asia and the whole manufacturing supply chain, you can just see a whole new fear game of "who lost China?".

In my latest economic piece, I wrote that I see little signs in the December trade data that Asian demand is picking up the slack of weakening US and European demand. That's a pity.

Instead, we have some very real threats on politics, as I mentioned before.

[Whet]

http://ibdeditorials.com/IMAGES/CARTOONS/toon020509.gif

[mikeelikee]

Who is going to pay? You are. And I am. And our children will. The current ratio of aggregate debt to GDP is higher than at any time in modern history, including the Great Depression. It has begun to correct itself, but we're not over the pain just yet, and this "spendulous" package will just exacerbate it.

The gub'mint's solution will most likely be to fire up the printing presses, print more money, and inflation will surely follow. Hunker down, boys...it's not gonna be easy.

[Whet]

Which is typical, the old media has not reported the CBO's report on the negative effects of the stimulus package on the US economy! According to the CBO, the Payoff bill will actually REDUCE the US economy!!


Macroeconomic Effects of the Senate Stimulus Legislation

In a letter sent today to Senators Grassley and Gregg, CBO analyzed the macroeconomic effects of an initial Senate version of the stimulus legislation (the Inouye-Baucus amendment in the nature of a substitute to H.R. 1, which is the House stimulus bill). CBO estimates that the Senate legislation would raise output by between 1.4 percent and 4.1 percent by the fourth quarter of 2009; by between 1.2 percent and 3.6 percent by the fourth quarter of 2010; and by between 0.4 percent and 1.2 percent by the fourth quarter of 2011. CBO estimates that the legislation would raise employment by 0.9 million to 2.5 million at the end of 2009; 1.3 million to 3.9 million at the end of 2010; and 0.6 million to 1.9 million at the end of 2011.
Those estimated effects are slightly greater than those of H.R. 1 (as introduced) in 2009 and 2010 (particularly in 2009), but lower in 2011, because more of the overall rise in spending and fall in revenues occurs in the first two years under the Senate legislation.
Most of the budgetary effects of the Senate legislation would occur over the next few years. Even if the fiscal stimulus persisted, however, the short-run effects on output that operate by increasing demand for goods and services would eventually fade away. In the long run, the economy produces close to its potential output on average, and that potential level is determined by the stock of productive capital, the supply of labor, and productivity. Short-run stimulative policies can affect long-run output by influencing those three factors, although such effects would generally be smaller than the short-run impact of those policies on demand.
In contrast to its positive near-term macroeconomic effects, the Senate legislation would reduce output slightly in the long run, CBO estimates, as would other similar proposals. The principal channel for this effect is that the legislation would result in an increase in government debt. To the extent that people hold their wealth in the form of government bonds rather than in a form that can be used to finance private investment, the increased government debt would tend to “crowd out” private investment—thus reducing the stock of private capital and the long-term potential output of the economy.
The negative effect of crowding out could be offset somewhat by a positive long-term effect on the economy of some provsions—such as funding for infrastructure spending, education programs, and investment incentives, which might increase economic output in the long run. CBO estimated that such provisions account for roughly one-quarter of the legislation’s budgetary cost. Including the effects of both crowding out of private investment (which would reduce output in the long run) and possibly productive government investment (which could increase output), CBO estimates that by 2019 the Senate legislation would reduce GDP by 0.1 percent to 0.3 percent on net.
http://cboblog.cbo.gov/?p=205

[Vaevictis]

A reduction of 0.3 percent over 10 years? Who the **** cares?

[Whet]

I guess, who the **** would NOT care they are contracting the economy with their socialism? Reducing the money in the private sector so much that it effects the economy?

Why the **** would anyone want to emulate the failed European socialist model?

[Vaevictis]

They're attempting to make a tradeoff. Move some of that long term growth up to short term at the cost of losing some of the long term.

You're talking about losing 0.3 percent of growth over ten years, when we just lost 0.95 in three months. Again, who the **** cares?

If you can prevent one year now losing 5%, it's probably worth losing 0.3% over ten. You probably won't miss the 0.00625% growth per quarter you forfeited, but you sure as hell will miss 1.25%.

[Vaevictis]

It's like you're worrying about the guy next to you with the sniffles when there's another guy pointing a 12 gauge in your face.

[Chuck Bao]

I guess, who the **** would NOT care they are contracting the economy with their socialism? Reducing the money in the private sector so much that it effects the economy?

Why the **** would anyone want to emulate the failed European socialist model?

Sometimes I hate economists. They could have just easily said: "Although the stimulus measures are positive in the short run, the increase in government debt is negative in the long run." We all kind of instinctively know that.

Trying to quantify the effects of crowding out of capital in the long term when most of the debt financing is foreign money coming in is dodgy at best.

I do hope that they are right on the stimulus measures increasing output by between 1.4% and 4.1% percent by the fourth quarter of 2009. That probably needs to come with the caveat ceteris paribus. Who knows the health of our banking system at the end of this year? Who knows about the global economy and new problems arising over the next 9 months?

What can I say? I am a doubter. I think the economic models are all broken. I really wonder why consumers should go out and spend when their job security is at stake. I am arguing this about Asia and I really wonder about the myth of the almighty US consumer.

[Chuck Bao]

This is a pretty fair article. It is very long, so I won't post it here.

http://www.msnbc.msn.com/id/29084713/

The key excerpt though is the following.


Goldman Sachs estimates the government would need to shell out $4 trillion or more to absorb all the banks' troubled mortgage and consumer debt.

How big is $4 trillion? It's more than one-third of the economic output of the United States in a year. It's more than twice as big as the first federal bailout and the coming economic stimulus combined. Just look at all those zeroes: $4,000,000,000,000.


The stimulus package that we are now debating will be small peanuts.