The more I look at Obama’s plan and this $825 billion dollar “stimulus” the more I feel like Col Kurtz in the movie Apocalypse Now when he muttered “the horror, the horror”. I predict that by the time they pass this bill, expected in mid-February, it will be greater than $1 Trillion dollars. I also predict that this number will be increased and we will have a second round come this Summer when it is realized this first round plus last Fall's bailout is not stopping the hemorrhaging. And why should it? It's the wrong medicine.
The catalyst of today’s scare was an article I read on the WSJ that touched on the question: Who pays for the debt? Who, specifically, buys the T-bills that even enable us to go into debt in the first place? The usual suspects were mentioned including the Chinese, Japan, and the Saudis.
When foreign nation governments and foreign individual investors buy T-bills they do so because they view it as a safe investment. However, there may, and I stress may, come a point where they no longer view it that way. The assumption America makes is that foreign money streaming in to buy Treasury’s at rates that are historically low is simply a given.
But, at some point, T-Bills mature and have to be paid in full. At some point, foreign investors may require a higher yield and higher interest rates for investing in American securities. Like any investment, investors seek the highest possible return. If foreigners do these things they may withdraw their money, they may require higher interest rates to lend to America’s debt.
At the end of the day, this is a potentially nightmare scenario. This could negatively impact the dollar of the value, increase inflation, make it harder for America to borrow, and actually make American securities almost like Junk bonds. The other option is that America could simply fire up the printing presses and simply print more money. This, however, serves to fuel inflation and lessen the value of American securities and their attractiveness because investors are primarily concerned with the real rate of return, which is the interest rate minus the inflation rate. If that is negative, investors tend to send their money elsewhere.
I used to think these alarmist scenarios were not possible. Sort of like a Y2K or man lives in the woods because of the coming nuclear holocaust or something like that. But I don’t consider the scenario laid out above to be that far-fetched anymore. Especially if pork policies like what we see now are pursued. These policies are not simulative. They are pork, pure and simple. They are intended to grow the economy from the “bottoms up” rather than through stimulating investment, which is needed to create sustainable jobs. The money we are indebting ourselves with now will dissipate as it goes through the economy. It is not akin to teaching a man to fish it is more akin to simply giving him fish and nothing more.
Unless the people America elected rethink what they’re doing and become more deliberate and careful, we are seriously headed for a major depression.