The Elephant in the Room Gets Some Press - The Deficit

The Ultimate Question

So deadly I wonder if few dare to even ask it?

Can these massive bail outs cause the United States to default on it's own debt?

There. I said it.

Honestly I don't know the answer but it is something I sure want answered. Otherwise it's like we have the bad uncle here, the gambling addict who we bail out and bail out yet he keeps ending up in Las Vegas only to be killed by a gang of loan sharks after we're out our life savings.

Is that scenario possible?

Let's find out.

Economists are now tallying up the numbers and estimating the effect of the latest bail out on the federal deficit and it ain't pretty.

Bloomberg is now reporting

The plan, which asks Congress for funds to buy devalued securities from financial institutions, would drive the debt above 70 percent of gross domestic product and the annual budget gap to an all-time high, possibly exceeding $1 trillion next year, economists estimated

Let's say that one again, 70% of GDP. That's gross debt, total debt.

But does that mean the United States defaults like the 3rd world country we really are?

According to economist Richard Felson the answer is the United States will be able to stay afloat but at a great cost.

He says inflation will increase, the dollar will fall and any sort of other function the United States normally provides, ya know, things like health care or infrastructure rebuilding, the U.S. would not be able to afford.

The New York Times blog is more conservative with a Federal 6% ratio to GDP...increase. It was currently estimated about 3.6% of GDP.

The Financial Times is reporting there is a tiny group betting the US would actually default on it's debt.

One frightening fact in this article is foreigners hold 20% of GDP of US government securities.

Seeking Alpha is now talking about hyperinflation in terms of stock recommendations!

Hyperinflation is a devastating phenomenon. It wipes out the middle class by destroying the value of cash, savings, bonds and other paper instruments. But, how does it affect stock markets? With the Federal government just having added $5.2 trillion in Fannie/Freddie liabilities of which about $600 billion will likely default, the Federal Reserve having now polluted its balance sheet by some $700 billion worth of toxic mortgage bonds with a 41.6% default rate ($291 billion in likely defaults), an $85 billion bailout for AIG, and, now, the Administration asking for some $700 billion more to bail out financial firms, it seems clear that the winds of hyperinflation are upon us

Where is the CBO or GAO on all of this? One would think we would have an immediate report.

It appears the results are currently impossible to predict

As the U.S. government embarks on a financial-rescue mission - whose cost is impossible to predict - the nation is already headed for a sustained period of budget deficits on a scale never seen before, said Peter R. Orszag, director of the Congressional Budget Office

Many are also predicting more and more going begging to foreign governments which also implies payments would become a major US export and debt the import.

All of this said, the CBO is on the spot tomorrow...testifying before Congress on the potential impact.

Update: A great post with all sorts of statistics/graphs on Americans and their debt load: Winter Watch.

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Comments

$$$$$$$$$$$ - Fed dumps in $30B in MM funds

Fed Dumps $30B in money market funds overseas.

The hits just keep on comin'!

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Us Gov Default?

Robert! You read my mind. The possibility of the US gov defaulting is though not a probable one, a VERY VERY possible one. Can you imagine, $1 trillion for buying undervalued securities? The fact that this is 70% of GDP is very shocking. If I can recall, it was only the 3rd world countries that once had numbers like those. Is the US transitioning? Is it their Karma for charging high interest to pooer countries over all these years? Their endless embargos? Whatever it is, you are RIGHT, hyperinflation will be the issue to be monitored. I think the US gov should take a lesson with the Canadian Gov, they’ve got their inflation under control for many years. I read a similar post on bail out debacle on Ian Campbell’s blog, this guy made some good points. One I really liked:
“The excesses of the past several years must be controlled in circumstances where ‘Wall Streeters’ have made what in a number of cases I believe fairly can be described as ‘egregious’ income amounts through the creation of debt-based and other ‘financial vehicles’ where arguably no ‘real value’ has been added to the economy by these activities - unless the promotion of continued U.S. consumer spending and resulting GDP growth numbers is by itself considered to be of ‘real value’ in the long-term.”
If you want to read the rest of the post see here: http://www.stockresearchportalblog.com/2008/09/desperate-people-do-despe...

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What would it look like if the US defaulted?

My grasp of economics is pretty elementary [so thanks for this blog]. Because of this I've had to start wrapping my mind around the credit crisis through analogy. Thinking that in some respects at least government debt might behave somewhat like personal debt, it seemed possible to me that the US could conceivably default on its debt just like a person who defaults on a mortgage.

I know what it looks like when one household defaults on a mortgage. And now because of the recent unpleasantness I know what it looks like when millions of people default. But what does it look like when a nation defaults on its debt?

I'm hoping you Economic Populists can explain it to me.

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Welcome to EP theZist

We're looking into it and yes we are people just like you, but because of the volume of information on the Internets these days, one can start digging around and wrapping your head around a lot of these issues.

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