Monday, September 29, 2008

The New New Deal, socialism wins in America

The US government is doing the unimaginable and going ahead with a $700b+ bail-out package of troubled Wall St giants. The cost will actually go into the trillions, as the $700b limit is on the rolling size of the fund, which can be used to purchase up to $700b of mortgage related, "illiquid" (i.e garbage) assets at a time, and then sell them off on the market.

Basically, the U.S taxpayer has to open their pockets and fund the loss on these crappy assets that sit on the balance sheets of a whole lot of banks who made the stupid decisions in the first place.

This is the biggest nationalisation in American history and is an affront to freedom, capitalism and the constitution (where does it mention Congress having the power to buy mortgage related assets)

How did this come to pass ? There was a massive public uproar over this proposal and it looked like a few brave congressman and senators would resist this unprecedented expansion of government. But of course, the Dems could easily be bought by inserting their populist agenda into the details of the bail-out package. Just staple on some limits on CEO salaries, a moratorium on foreclosures and other sweeteners for home owners and presto, it looks like a "balance was struck".

The idiotic media commentary has been enthusiastic for this scheme, and as usual, very myopic and focussed only on the hear and now. Here are some problems, and predictions I have about this disaster, that the media should take heed of.

  • This is not going to end the credit crunch. This is going to cause it to spread, so that even the credit rating of the US government will be brought into question. Sovereign US debt has never been backed up by any tangible assets like gold bars, its always been resting upon "the full faith and credit of the US government". And there is no way that such an empty guarantee will maintain a AAA credit rating in the coming years.
  • This will boost the sharemarket - for the coming week. Volatility will remain, many more companies will collapse. The bear market is far from over.
  • This will absolutely destroy the US dollar. Where is the US government getting the trillions of dollars to fund this scheme when they are already running a massive deficit ? Creditors will soon question the ability of the US government to repay its obligations and dump their holdings of US dollars.
  • This will be very inflationary, as the Fed and Treasury will try to expand the supply of money and credit, and the price of all real assets, in terms of $US, will shoot up. Watch gold in particular. Oil may suffer downwards effects of an impending global economic slowdown, but gold will only go up in inflationary environments.
  • This will NOT be the last bail out, this will NOT bring stability to financial markets.
  • The US government will be unable to pay for its massive budgets, and will need to slash expenditure. Abolishing social security and medicare are the only viable options, as well as cutting back on their military expenses, which include operating bases in 130 different countries.
The parallels with this story and with Atlas Shrugged are too strong to ignore. Socialism is here and the U.S.S.A will collapse as a super power if they do not end the statism in Washington and return to their tradition as a free, capitalist society.