Sunday, September 21, 2008

Hold the phone on the bailout plan.

At the Naked Capitalism blog there is a must-read post entitled "Why You Should Hate the Treasury Bailout Proposal." It has blown my mind and made me deeply concerned for the future of America.
I'm very concerned as Bush and Republicans are calling on Congress to rush through the package as-written.

Summary of reasons to hate the bailout:
1. The proposed bill gives Paulson unlimited authority and zero oversight. Any actions he takes would not be allowed to be reviewed by any administrative agency or the courts. (Would the Supreme Court strike the bailout down because of the "no courts" clause? If not, does that mean we're now Soviet?)
2. Paulson isn't being honest. He's planning on buying the troubled assets for above-market value. You're essentially "throwing taxpayers money to the financial world," to quote a liberal economist who opposes the plan.
3. It could cost well over $700 billion, that's only the amount Paulson could have outstanding at any one time. The bill gives no cap on the spending limit, it could be as high as he wants.

The real scary stuff is in the long-run. This $700 billion comes on top of the projected $500 billion deficit projected for next year. At what point do foreign countries stop lending us money? As I pointed out last year, we're headed for a huge problem. Over the next 20 years we're facing a huge increase in entitlement and health care spending for the aging Baby Boomers, and massive deficits. Today's bailout simply adds to this (worse if Democrats attach an "economic stimulus" package to it).
At some point America will become like every other deficit-happy country and default on its debt. That would mean China, Europe, Japan, etc. stopping their purchase of U.S. Treasury Bills to fund our deficit. It would mean a huge devaluation of our currency, a collapse of the dollar.

Naked Capitalism speculates that maybe if the bailout legislation gets passed as-is, the world will see the writing on the wall of U.S. default happening very soon and stop loaning us the money.

"We have said more than once that the the US in the same position as Thailand and Indonesia, circa 1996, except we have the reserve currency and nukes. It looks like we will have the opportunity to see how those two assets influence the end game."

My plan is to move away from dollar-denominated assets over the next 10 years as we prepare to make our move to Estonia. Call me crazy, but the odds of inevitable dollar collapse happening soon seem better than ever right now. My generation can't even fathom what America would look like then.

Economists debate how long things can go on just as they are now with no consequences; in other words: How long can America be the exception to the rule rather than a proof of it? That's the $700 billion question.


Keith Walters said...

"Unlimited Authority" that sounds rather strange within a system designed to have checks and balances.

Ok so you are definitely going to think I am an idiot, which I may be :), but how exactly does the purchasing of "U.S. Treasury Bills" by foreign powers work? How indebted are other major world powers?

JTapp said...

Other countries' central banks purchase our Treasury bills on the open market just like anyone with an E-Trade account.

Here is a Wikipedia list of other countries debt as a % of GDP. You'll see we're 26th on the list, but we'll jump up a few spots after this year's undertakings. Powers of us on the list are Japan, Italy, France, and Israel.

Our debt to tax receipts ratio will now be close to 440%. That means the gov't owes over 3 times what it is able to take in tax revenue. (Got that stat from this Christian blogger).

Your taxes WILL be higher soon, no matter who gets elected. The more debt we pay annually, the less is available for other programs and the more we have to tax or fund by even more borrowing.

Our overall debt ceiling has now been raised to 11 trillion dollars. Reaching that ceiling would be about 85% of our GDP.

Today the G7 countries said they will "do whatever is necessary" to help us, essentially assuring us that they'll lend us the money.

Oil jumped as speculation runs about the future devaluation of the dollar. The Fed will have to create money to pay for some of the 700 bil. and the rest will be borrowed.

Bottom line: More future debt means less future wealth and a lower standard of living. Our kids will be worse off than we were growing up.