The Great Depression Online

Great Depression Online Archive Issue:

U.S. Government Bailout

Great Depression Online
Long Beach, CA
October 05, 2010

Inside This Issue You Will Discover…

*** Meeting to Contemplate Nonsense
*** No Longer a Staggering Shortfall
*** U.S. Government Bailout
*** And More

Meeting to Contemplate Nonsense

Government agencies come into existence by edict, stretch and grow, and slurp up the gravy at the feeding trough year after year forever and ever.  One thing they never do…they never die.

Just take the Commission of Fine Arts.  According to its website, “The Commission of Fine Arts, established in 1910 by Act of Congress, is charged with giving expert advice to the President, Congress and the heads of departments and agencies of the Federal and District of Columbia governments on matters of design and aesthetics, as they affect the Federal interest and preserve the dignity of the nation’s capital.”

How’s that for nonsense?

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But somehow, someway, the Commission of Fine Arts has been hard at it for 100-years…dispensing their “expert advice” to the President.  Here’s what they’re up to this month…

Agenda Item 1 of the October Board Meeting, scheduled for this Thursday, will consider “standards for fencing around tree beds in various sites.”  No fence goes installed, you see, and no tree bed goes touched in DC, without first having proper approval and authorization.

With useless agencies like this meeting to contemplate nonsense each month is it any wonder last fiscal year’s deficit came in at over $1.47 trillion?

No Longer a Staggering Shortfall

That’s right.  Last Friday kicked off the 2011 fiscal year.  There’s still no federal budget in place…but not to worry, the President signed a Continuing Resolution to keep the lights on until December 3rd.  For now, let’s look at the sea of red from fiscal year 2010…

“The final numbers for FY’10 won’t be in for a few weeks,” reported CBS, “but OMB's [Office of Management and Budget’s] most recent assessment projected the deficit for the year just ended would hit $1.471-trillion, the biggest in U.S. history.  It’s a number that amounts to 10 percent of the total economy.”

Just several years ago this would have been a shocking, staggering, annual shortfall.  Yet, these days, for whatever reason, no one seems to give it a second glance.  That hasn’t always been the case.

Historically, when a nation runs a budget deficit in excess of 6 percent of GDP foreign investors become anxious, and the country’s currency becomes stressed.  And sometimes, if foreign investors get too anxious, they sell in mass resulting in a rapid devaluation.

For example, in 1994 Mexico was running a deficit that was 7-percent of GDP.  Everything was wonderful, until suddenly it wasn’t.  One day, late in the year, foreign investors panicked.  They dumped their holdings and the peso crashed in spectacular fashion.  In the space of one week the peso fell 44-percent against the dollar.  Mexico’s economy crashed too.

Argentina got into some trouble at the turn of the 21st century too.  In 1999 Argentina’s GDP dropped 4 percent and the country entered a recession.  The country’s public debt had grown throughout the 1990s and, as GDP dropped, foreign investors began to fear that they wouldn’t be able to pay it back.  A flight of money away from the country followed in 2001. 

To salvage what wealth they had, the Argentine locals began withdrawing large sums of money from their bank accounts, converting them to dollars, and sending them to the U.S.  That’s when the government froze their bank accounts.  After that, the economy collapsed completely.

U.S. Government Bailout

Debt, remember, is what got us into this mess to begin with.  Leading up to the crisis it was private debt that was skyrocketing.  Since the crisis it has been public debt that has shot up and off the charts.

In late 2008, when the whole financial system was at the brink of collapse, the Troubled Asset Relief Program – TARP – was created to use government money to make capital injections into banks to stabilize the financial system.  As of Sunday, TARP expired…here we offer a few departing words…

Perhaps TARP kept the whole financial system from imploding but it also blew a cool, icy frost across the economic landscape.  Two years later and the tundra still hasn’t thawed.

Aside from bailing out the big banks TARP also served an even greater, less reported, purpose.  It served to bailout, if only temporarily, the U.S. Government.  Here’s what we mean…

On October 1, 2008, 10-year treasuries yielded 3.76 percent.  On October 1, 2010, 10-year treasuries yielded 2.53 percent…32.7 percent less.  So, with the national debt increasing by nearly $1.5 trillion a year, for two consecutive years, just who in the world’s lending money to the government for so cheap?

Not China.  Between July 2009 and July 2010, China reduced its holdings of treasury securities by $93.2 billion.  So if it’s not China, then who?

One source is our banks and financial institutions.  Typically in a recession banks reduce the number of loans they make.  The safer, surer, bet for banks is to buy treasuries.  Still, to finance back-to-back $1.5 trillion dollar deficits, you’d expect interest rates to increase to attract more buyers.  But rates haven’t gone up…they’ve gone down.

Here’s why…

TARP injected money into banks to keep them solvent.  The banks used the money to buy treasuries.  This false demand for treasuries kept interest rates artificially low.  And the U.S. Government ran a $1.5 trillion dollar deficit two years in a row.

With TARP now dead how will the government fund next year’s deficit?

We have some ideas…we’ll share them with you soon.


M.N. Gordon
Great Depression Online

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