This Is Insanity, and It Will not Last

Today, President Bush and congress announced that they have tentatively reached an agreement to borrow $150 billion dollars from foreign countries to prop up the ailing US consumer. This is on top of the nearly $250 billion dollars the US government was expected to borrow from foreign governments in the currently budgeted fiscal year. These estimates also do not include the untold billions that the government will eventually need to bail out Fannie Mae and Freddie Mac due to the new mandate to insure larger, riskier loans. Wall Street and strapped US consumers cheered the news.

This is not the headline that has been reported elsewhere, but it should be. US consumers have spent beyond their means. They took on too much debt, got used to lifestyles they could not afford. Eventually, the credit spigot ran out, and they pleaded to their government for help.

Now here comes our government to save us, suffering from a similar ailment. Like many consumers, our government spends more money that it takes it. Passing tax increases (revenue generating measures for the government) is political suicide. Decreasing spending (decreasing expenditure) is political suicide.

Let’s look at the US government as if it were a stock. What would you pay for a business that was expected to lose $400 billion dollars this year, has shown consistent losses for much of the last 20 years, and has net debt of $5.5 billion dollars? If you were to lend this entity money, how much would you demand in interest? The market rate is current about 4%--if this were a business, and not the government, the rate would be exponentially higher and, in reality, the entity would be unlikely to get any credit at all. The government is, for all intensive purposes, a bankrupt entity that continues to operate only because of the leniency of its creditors.

Entities that spend more money than they take in eventually face a day of reckoning. We have once again chosen a short term solution that will exacerbate the inevitable day when we must balance our budget. When the US government spends beyond its means, it must issue treasury bonds (read: debt). Our government will rely on mostly foreign governments buying nearly $400 billion dollars of this debt in the upcoming year at interest rates of ~4%, amid a declining dollar, which likely will result in negative real returns.

How long will people take that investment for? What happens if the interest rate rises (note: mortgage rates are tied to treasury rates, not fed fund rates)? What happens when people no longer buy the worthless paper our government is issuing?

We have made a choice as a society. Rather than face the consequences of our poor choices, we continue to make more poor choices that raise the stakes on the eventual pain higher and higher. This is insanity, and it will not last.