Stimulus: Will It Work? Who Will Loan Us The Money?
July 28, 2016 at 4:25 p.m.
By Gary [email protected]
And, frankly, I was fairly impressed with the sausage grinder that is our legislative process in Washington, D.C. The end result is far superior to the initial offering from the House of Representatives.[[In-content Ad]]In the end, there was more money for what I perceive to be stimulus - infrastructure programs and tax incentives for home buyers and car buyers - and less money for routine government spending.
So I applaud the members of Congress who were willing to compromise and put this thing together. It was no small feat.
The Democrats pushed the final version through the House Friday night. The Senate is expected to follow suit and the President will sign it.
Now, whether this will work is anybody's guess. There are lots of economists who think not. They include Nobel Laureates like James Buchanan, Vernon Smith and Ed Prescott, who, along with 200 other economists, signed a letter opposing the legislation.
World renowned Harvard economist Robert Barro went as far as to call the legislation - on both the spending and taxing sides - garbage.
But what do they know?
I, on the other hand, can say with complete honesty and freedom of conscience that I have no clue if it will work.
Given that level of ignorance, I will resign myself to blind faith and simply hope and pray that it does.
I mentioned in a column a while back that the economy, sooner or later, will rebound no matter what the government does. The idea is to make it rebound more quickly. Will this plan do that? I don't know.
Enough of what I don't know. Here are some things I do know. And the things I do know are quite unsettling to me.
Further unsettling is the fact that unless you are some level of economics junkie, you will never have heard any of this stuff.
Frankly, I think it probably is more important than what you see on CNN all day - economy, stimulus, Congress, economy, stimulus, Congress.
I'll lay it out and you decide, but it seems to me CNN should be all over this.
The U.S. government is broke. No argument there. Nonetheless, Congress has passed a two-stage bailout for banks and financial institutions and a stimulus package for the rest of the economy.
But that's just the tip of the iceberg with regard to how much money the government is throwing at the current financial crisis.
A report in Bloomberg notes the stimulus packaged passed this week raises the government's commitment to solving our economic woes to $9.7 trillion.
(Anecdotally, Bloomberg notes that is enough to pay off 90 percent of the nation's home mortgages, valued at $10.5 trillion.)
See, the Federal Reserve, Treasury Department and the Federal Deposit Insurance Corporation have spent or lent almost $3 trillion over the past two years and have pledged up to $5.7 trillion more.
That's a lot of money.
And the startling thing about it is only the $789 billion stimulus bill passed this week, the $700 billion in bank rescue money passed in November and W's $168 billion in tax rebates last summer were voted on by legislators.
Virtually all of the rest - around $8 trillion - is in guarantees and lending programs under the Fed and the FDIC. The recipients of all this have not been disclosed
Bloomberg quoted North Dakota Senator Byron Dorgan, a Democrat, who said, "We've seen money go out the back door of this government unlike any time in the history of our country. Nobody knows what went out of the Federal Reserve Board, to whom and for what purpose. How much from the FDIC? How much from TARP? When? Why?"
Unsettled yet? There's more.
All this money is money the government doesn't have. Remember, the government is functionally broke, spending more than it takes in annually.
Where is all this money going to come from? How can government possibly meet all these obligations?
Well, up until now - and if you ask policy makers, forever into the unforeseen future - the government sells the debt.
They auction off Treasury bills to China, Saudia Arabia or several other "primary buyers" of government securities.
And up until now - and if you ask policy makers, forever into the unforeseen - it has been relatively easy for them to do so.
U.S. debt was a pretty good investment. China and Saudi Arabia own a pile of it. The U.S. is good for it, right? No chance of the U.S. defaulting on its treasury bill obligations, right?
Well, there are these investments - derivatives - called credit default swaps. Without going into a long, tedious explanation, let's just say these allow investors to bet whether or not an entity is going to default on its obligations.
Investors are increasing their use of credit default swaps to bet that the U.S. will default on its ability to pay on its treasury debt.
Entities carry a rating.
Currently, the U.S. is rated riskier than Germany and Japan. The markets say the U.S. is more likely to default on its obligations than those other countries.
The experts say the possibility is low, but the ultimate question - Can the U.S. government default on its treasury bill obligations ? - is being asked.
That was unthinkable not long ago.
Of course, this begs another question. If the U.S. is at risk of default, who's going to buy U.S. Treasuries?
On Feb. 2 there was an auction. The treasury put up $30 billion worth of five-year notes. There were no takers among the usual primary dealers. The auction was barely spared by an anonymous "indirect" bid, the Treasury Department reported.
Buyers are a bit bummed on U.S. Treasuries. Yields aren't that great.
Compounding the problem is the sheer magnitude of Treasuries that will flood the market over the next two years.
The quarterly report to the Secretary of the Treasury from the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association was released Monday. (TBACSIFMA - Now there's an acronym.)
Here's an excerpt:
The net supply of Treasuries in 2009 and 2010 combined seems likely to total more than $3 trillion and could climb as high as $4 trillion. The Congressional Budget Office (CBO) estimates the 2009 Federal budget deficit to be $1.2 trillion. The consensus of private sector analysts is similar to that figure. Yet, neither the CBO estimate nor the private consensus reflect fully the funding needs associated with the Obama Administration's fiscal stimulus plans, the implementation of TARP (or another TARP-like program), or the rumored creation of a bad/aggregator bank to help deal with the underperforming assets weighing down financial institutions.
The advisers say that's OK, though, because demand for Treasury securities will remain high. They surmise that in these troubled economic times, investors won't flee the safety of government securities for more risky asset classes.
But it seems to me there's evidence that's precisely what's starting to happen. The demand for gold is on the rise as investors turn away from U.S. debt as an investment.
Those guys on the TBACSIFMA are way smarter than I am about these things. And maybe the world will continue to buy up our debt, no matter how lousy of an investment it is because they fear the consequences if they don't.
But I can't help but wonder:
What happens if the world gets leery of propping up our government's massive debt? What happens if the U.S. defaults on some of its Treasury obligations?
Dollar collapse? Hyperinflation?
I don't know, but one thing is sure: None of it will be pleasant.
And, frankly, I was fairly impressed with the sausage grinder that is our legislative process in Washington, D.C. The end result is far superior to the initial offering from the House of Representatives.[[In-content Ad]]In the end, there was more money for what I perceive to be stimulus - infrastructure programs and tax incentives for home buyers and car buyers - and less money for routine government spending.
So I applaud the members of Congress who were willing to compromise and put this thing together. It was no small feat.
The Democrats pushed the final version through the House Friday night. The Senate is expected to follow suit and the President will sign it.
Now, whether this will work is anybody's guess. There are lots of economists who think not. They include Nobel Laureates like James Buchanan, Vernon Smith and Ed Prescott, who, along with 200 other economists, signed a letter opposing the legislation.
World renowned Harvard economist Robert Barro went as far as to call the legislation - on both the spending and taxing sides - garbage.
But what do they know?
I, on the other hand, can say with complete honesty and freedom of conscience that I have no clue if it will work.
Given that level of ignorance, I will resign myself to blind faith and simply hope and pray that it does.
I mentioned in a column a while back that the economy, sooner or later, will rebound no matter what the government does. The idea is to make it rebound more quickly. Will this plan do that? I don't know.
Enough of what I don't know. Here are some things I do know. And the things I do know are quite unsettling to me.
Further unsettling is the fact that unless you are some level of economics junkie, you will never have heard any of this stuff.
Frankly, I think it probably is more important than what you see on CNN all day - economy, stimulus, Congress, economy, stimulus, Congress.
I'll lay it out and you decide, but it seems to me CNN should be all over this.
The U.S. government is broke. No argument there. Nonetheless, Congress has passed a two-stage bailout for banks and financial institutions and a stimulus package for the rest of the economy.
But that's just the tip of the iceberg with regard to how much money the government is throwing at the current financial crisis.
A report in Bloomberg notes the stimulus packaged passed this week raises the government's commitment to solving our economic woes to $9.7 trillion.
(Anecdotally, Bloomberg notes that is enough to pay off 90 percent of the nation's home mortgages, valued at $10.5 trillion.)
See, the Federal Reserve, Treasury Department and the Federal Deposit Insurance Corporation have spent or lent almost $3 trillion over the past two years and have pledged up to $5.7 trillion more.
That's a lot of money.
And the startling thing about it is only the $789 billion stimulus bill passed this week, the $700 billion in bank rescue money passed in November and W's $168 billion in tax rebates last summer were voted on by legislators.
Virtually all of the rest - around $8 trillion - is in guarantees and lending programs under the Fed and the FDIC. The recipients of all this have not been disclosed
Bloomberg quoted North Dakota Senator Byron Dorgan, a Democrat, who said, "We've seen money go out the back door of this government unlike any time in the history of our country. Nobody knows what went out of the Federal Reserve Board, to whom and for what purpose. How much from the FDIC? How much from TARP? When? Why?"
Unsettled yet? There's more.
All this money is money the government doesn't have. Remember, the government is functionally broke, spending more than it takes in annually.
Where is all this money going to come from? How can government possibly meet all these obligations?
Well, up until now - and if you ask policy makers, forever into the unforeseen future - the government sells the debt.
They auction off Treasury bills to China, Saudia Arabia or several other "primary buyers" of government securities.
And up until now - and if you ask policy makers, forever into the unforeseen - it has been relatively easy for them to do so.
U.S. debt was a pretty good investment. China and Saudi Arabia own a pile of it. The U.S. is good for it, right? No chance of the U.S. defaulting on its treasury bill obligations, right?
Well, there are these investments - derivatives - called credit default swaps. Without going into a long, tedious explanation, let's just say these allow investors to bet whether or not an entity is going to default on its obligations.
Investors are increasing their use of credit default swaps to bet that the U.S. will default on its ability to pay on its treasury debt.
Entities carry a rating.
Currently, the U.S. is rated riskier than Germany and Japan. The markets say the U.S. is more likely to default on its obligations than those other countries.
The experts say the possibility is low, but the ultimate question - Can the U.S. government default on its treasury bill obligations ? - is being asked.
That was unthinkable not long ago.
Of course, this begs another question. If the U.S. is at risk of default, who's going to buy U.S. Treasuries?
On Feb. 2 there was an auction. The treasury put up $30 billion worth of five-year notes. There were no takers among the usual primary dealers. The auction was barely spared by an anonymous "indirect" bid, the Treasury Department reported.
Buyers are a bit bummed on U.S. Treasuries. Yields aren't that great.
Compounding the problem is the sheer magnitude of Treasuries that will flood the market over the next two years.
The quarterly report to the Secretary of the Treasury from the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association was released Monday. (TBACSIFMA - Now there's an acronym.)
Here's an excerpt:
The net supply of Treasuries in 2009 and 2010 combined seems likely to total more than $3 trillion and could climb as high as $4 trillion. The Congressional Budget Office (CBO) estimates the 2009 Federal budget deficit to be $1.2 trillion. The consensus of private sector analysts is similar to that figure. Yet, neither the CBO estimate nor the private consensus reflect fully the funding needs associated with the Obama Administration's fiscal stimulus plans, the implementation of TARP (or another TARP-like program), or the rumored creation of a bad/aggregator bank to help deal with the underperforming assets weighing down financial institutions.
The advisers say that's OK, though, because demand for Treasury securities will remain high. They surmise that in these troubled economic times, investors won't flee the safety of government securities for more risky asset classes.
But it seems to me there's evidence that's precisely what's starting to happen. The demand for gold is on the rise as investors turn away from U.S. debt as an investment.
Those guys on the TBACSIFMA are way smarter than I am about these things. And maybe the world will continue to buy up our debt, no matter how lousy of an investment it is because they fear the consequences if they don't.
But I can't help but wonder:
What happens if the world gets leery of propping up our government's massive debt? What happens if the U.S. defaults on some of its Treasury obligations?
Dollar collapse? Hyperinflation?
I don't know, but one thing is sure: None of it will be pleasant.
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