Share
Cost of U.S. Crisis Action Grows, Along With Debt (Update1)
By Matthew Benjamin
Oct. 10 (Bloomberg) -- The global financial crisis is turning into a bigger drain on the U.S. federal budget than experts estimated two weeks ago, ballooning the deficit toward $2 trillion.
Bailouts of American International Group, Fannie Mae and Freddie Mac likely will be more expensive than expected. States are turning to Washington for fiscal help. The Federal Reserve said this week it will begin buying commercial paper, the short- term loans companies used to conduct day-to-day business, further increasing costs. And analysts now say the $700 billion bank- rescue plan passed by Congress last week may have to be significantly larger.
``I always assumed they would be asking for more money along the way if it was necessary, and it looks like it's going to be necessary,'' said Stan Collender, a former analyst for the House and Senate budget committees, now at Qorvis Communications in Washington. ``At the moment, there's nothing happening here that's positive for the budget. Nothing.''
The 2009 budget deficit could be close to $2 trillion, or 12.5 percent of gross domestic product, more than twice the record of 6 percent set in 1983, according to David Greenlaw, Morgan Stanley's chief economist. Two weeks ago, budget analysts said the measures might push deficit to as much as $1.5 trillion.
Yields to Rise
That means a lot more borrowing by Treasury, which will push up interest rates, said Greenlaw. ``The Treasury's going to be ramping up supply dramatically over the course of coming months to meet this enormous federal budget obligation,'' Greenlaw told Bloomberg this week. ``The supply will trigger some elevation in yields.''
Treasuries have fallen the past four days even as stocks sank, a sign investors are preparing for bigger U.S. government borrowing. Benchmark 10-year note yields rose to 3.82 percent at 7:49 a.m. in New York, from a close of 3.45 percent Oct. 6.
Payments the government allocated to keep vital companies solvent are beginning to look insufficient.
AIG, the giant insurance company that was taken over by the government in mid-September, said this week it may access $37.8 billion from the Federal Reserve Bank of New York, in addition to the $85 billion the government already loaned it to stave off bankruptcy.
``You're in for a dime, you're in for a dollar on this one,'' said David Havens, a credit analyst at UBS AG.
The financial health and earnings prospects of Fannie Mae and Freddie Mac -- seized by the government on Sept. 7 to prevent them from failing -- worsened in the second and third quarters, the companies' government regulator said this week.
Price Declines
The companies and regulators are recalculating the value of all of their assets to factor in price erosion. That may mean the government will have to spend more to keep the firms solvent.
Earlier this week the Fed announced it will create a special fund to buy commercial paper, the credit that businesses use to finance payrolls and other ongoing expenses. The Treasury will deposit money into the Fed's New York district bank to help set up the new unit. A Fed official said Treasury funding for the program could be ``substantial.''
California, Alabama and Massachusetts are urging the Fed and Treasury to include their securities in rescue plans designed for banks and businesses. The $2.66 trillion U.S. market for state and city bonds has been all but frozen since Lehman Brothers Holdings Inc., weighed down by losses in mortgage-backed bonds, declared history's largest bankruptcy on Sept. 15.
California has said it needs to sell as much as $7 billion in notes to maintain its schools, health system and other public services. The Bush administration said it is reviewing the states' financial positions.
Plan for Banks
Meanwhile, Treasury Secretary Henry Paulson indicated two days ago that he is considering buying stakes in a wide range of banks in coming weeks to help recapitalize them.
Such a move is allowed under the $700 billion bailout package Congress passed last week. Edmund Phelps, winner of the 2006 Nobel Prize for economics and a professor at Columbia University, said such action is necessary -- and will likely turn out to increase the measure's cost. Spending beyond the amount set in last week's bill would require further Congressional approval.
``We have to recapitalize the banks,'' Phelps told Bloomberg Television this week. ``I don't imagine that there's enough money in the first Paulson plan to be able to do all that needs to be done in that direction.''
The additional borrowing could push the national debt well past 70 percent of GDP, the highest since the immediate aftermath of World War II, when the U.S. was still paying off war debt.
Debt Limit
Gross U.S. debt, which includes debt held by the public and by government agencies, this year reached about $9.6 trillion, or about 68 percent of gross domestic product. The rescue legislation increased the government's debt limit to more than $11.3 trillion from $10.6 trillion.
On top of all that, budget watchdogs say the sheer size of the interventions is making Washington more profligate than usual. To attract votes in Congress, leaders added several costly items to the $700 billion rescue, including extensions of some tax credits and tax breaks for makers of wooden arrows and stock- car racetrack owners.
Under normal circumstances, there would have been more resistance to such expenses, said Robert Bixby, executive director of the Concord Coalition, a non-partisan budget watchdog.
The rescue legislation ``creates a mask for all sorts of fiscal irresponsibility,'' said Bixby. ``It covers up a multitude of sins.''
To contact the reporters on this story: Matthew Benjamin at [email protected]
Comment:
We are only at the start of a period in of government spending that has only been match in modern times in 1921-1923 Germany.
Very shortly, the governments of the world will run budget deficits that will exceed 5-10% of their GDP. The US is already locked in for a budget deficit in excess of 12.5% of their GDP.
Remember we are only at the start of the spending orgy. It can and will only get worse. These are the consequences of this bailout of banks and taking over bank guarrantees.
In economics for every decision their is a consequence. The price of this consquence will be massive deficit spending by most of the worlds governments.
These deficits will lead to higher government borrowings and almost certainly higher money supply growth.
For those of you who have never experienced a rescession / credit crisis do not confuse the current asset and commodity price falls with future continuous periods of deflation.
This is a debt de-leveraging and wealth destruction process. This is the symptom. The patient is just about to get some serious stimulus drugs from the governments.
As a minimum we are on a path to rampant money supply growth of at least 12% per annum for the 5-10 year time horizon, and further, governments around the world now loaded up tho their necks in debt.
The Weimar Republic of Germany's politician acted in their own and their constituents best interest.
You dont think it can happen ?
Then tell me who predited the point we are in now where more debt creation does not create more wealth. Creditors everywhere do not feel safe to lend.
In the next few months expect massive retrenchments, union strikes demanding pay rises, higher interest rates forced up by US Govt borrowings.
The price of US treasuries have reflected this very fact in the last two days.
Investment decisions now should be based on the premise of what investments do well in an extreme low growth high inflation environment.
The price of gold in the physical market is disconnected from the conrtrolled paper market gold. The disconnect will grow more as each day passes.
We are in trouble my frienda and I have never in my life been more positive on an investment than I am in gold right now.
As for the price fall on friday. It does not worry me in the slightest.
The price on the Bloomberg or CNBC Channel is not the real price being paid by the market.
The number on the screen is the best disguised price attemp that the government can publish.
Sure it ran high but its still $100 USD abive where it was 30 days ago. More than 200 USD where it was 2 years ago.
Nothing goes straight up. And people are liquidating now. The physical gold market is +$100 more than paper published gold.
Think about what the future holds before dumping your gold.
Y
