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Last Nail in the Coffin for the U.S. Economy

Economics / US Economy Jan 14, 2009 - 04:23 PM GMT

By: Money_and_Markets

Economics

Best Financial Markets Analysis ArticleMartin Weiss writes: 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 the Inevitable 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

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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