Just Lost $23 Billion in Autos? No Worries – We’ll Print More


Today’s headline wasn’t surprising:

Taxpayers face heavy losses on auto bailout

Taxpayers likely to face significant losses on $81 billion auto bailout, watchdog report says

It seems that at least $23 Billion of the $81 billion handed to the auto industry will not be repaid according to this article:

Auto Bailout AP

Well what did you expect? And I know some of you, who lost your job are likely saying, “why weren’t we bailed out?” Our business would have recovered if we got money from the ‘guvmint.’ Well that’s the way the cookie crumbles I guess – but as the government continues its policy of picking winners (and I don’t mean their noses, though I’d prefer that these folks sit around and do that than do what they have done over the past year), people will grow increasingly angry.

Be aware of the huge social implications of the what the government is doing. I know people hate to look ahead more than 60 days but bear with me on this one :). The elected side of the government continues to pick winners and spend taxpayer money on industries, bailing out banks, and heavy social spending – therefore, the population increasingly expects more help from ‘Big Daddy (i.e. government).’ At the same time, the Federal Reserve is also picking winners and printing money to give to bankers who can’t run a business. And on the side, they are also purchasing mortgage bonds to keep interest rates low.

Now imagine that a few years down the line, we reach the point where interest payments grow substantially as a portion of annual tax revenues (wait, aren’t they ALREADY a substantial portion?) – due to heavier government borrowing and the moving up of long term rates. Oh and by the way, according to sources, the government is refinancing our national debt for shorter and shorter terms to keep rates down – effectively refinancing their “mortgage” with a 3-5 year adjustable loan – and we know how that worked out for individuals (guess how it will work out on a national scale). The government can less and less afford their generous handouts to long term unemployed people and to inefficient companies like GM and AIG.

At the same time, the Federal Reserve has filled the system with extra dollars. How? By buying up mortgage bonds in the open market, they take these government backed bonds off the table. The people who SOLD these bonds now have to find a new place for money. Since yields are low on bonds, many of these investors are buying STOCKS and propping up the market (see? you never know exactly where money printing will influence – many people thought it would spur lending – it has instead spurred stock prices). With all these extra loose dollars looking for a home (not all the extra money is going into stocks, some into cash), they will be ripe to spur consumer price increases.

Also at work are foreign countries tired of earning low rates of return on our bonds and being stuck in US dollars that we print like confetti. Already creditor nations are diversifying away from the dollar. For example, China revealed that they increased their gold reserves 75% over the last 5 years (which they did quietly – no desire to rock the boat while they still heavily own dollars). China is also buying raw materials (such as copper) and stockpiling them versus buying more US bonds. In newer developments, Japanese citizens have elected a government that plans to move away from super close cooperation with the US and make more of their own path. Not sure how this will turn out but perhaps they will buy fewer dollars also?

As they refuse to continue their buying of more of our debt (earning lower interest rates), rates will have to RISE to entice borrowers to US bonds – this is when our interest payments spike and we have difficulty meeting obligations and probably when the Fed money printing and buying bonds game goes into hyper-drive thereby exacerbating the situation outlined above. The result is a falling dollar and consumer goods, much of which we import, climbing in price tremendously. This will be an issue that the government can’t pay to fix, nor can the Fed print to fix and the result may be enormous social unrest as angry citizens go to ‘Daddy’ again for a solution that Daddy can’t provide. Some effects are already being felt (use my search feature to find articles I wrote on increasing crime and Japanese pick pocketing grandmas).

This is the scenario that we are likely heading in unless new leadership comes in, cuts spending, and ELIMINATES the deficit and starts lowering debt. At the same time, raising rates so that 1. savers can earn SOMETHING (if you are a saver aren’t you tired of bailing out the deadbeats? That’s what your low interest rate is doing), 2. investors will continue to buy our bonds, so that 3. consumer price levels stabilize or even fall a bit (what’s wrong with a little deflation???).

I don’t count on my fellow citizens voting for the right people though I try to influence (I don’t mean the previous leadership either – both Obama and Bush will go down as the two that destroyed the dollar, but I hope they take the sidecar to Sir Alan Greenspan – Mr. Bubble himself).  Therefore, if you think as I do that it is almost inevitable due to elected officials’ need to satisfy people in the short term vs making a good long term decision, then you must take defensive action. I have.

Chris Grande