This Tuesday, the President is expected to sign into law a bill that was rushed into passage with about as much obfuscation as one can imagine. (Why is he waiting until Tuesday to enact this "urgent" legislation?) Normally, bills are released in the form of a PDF document that is searchable by certain keywords that normally arouse suspicion. But this time, the Spending Bill, all 1,071 pages of it was released at 1:00 in the morning in the form of a paper document (that can't be searched) with voting in the House scheduled for 10:00 am so that there would clearly not be any time for review. This was obviously done so that those who feverishly poured over the bill couldn’t be as effective in ferreting out nonsense as they normally would. Democrats freely admitted that nobody read the bill they passed.
Mr. President, where’s the “unprecedented responsibility” in that? Is that what you mean by “transparency?” Or do you just think the American people will accept whatever you have to say. By “accountability” do mean the alleged $787 Billion price tag or the real price tag of $3.37 Trillion (over 10 years) as estimated by the Congressional Budget Office?
So here we are about to force upon our children another installment of perpetual debt that will drown our nation and our children. The soap opera continues this week when Secretary Tim the Tax Cheat will ask our children to pay the cost of re-capitalizing our banks, as much as $2 Trillion. His plan includes capital injections to banks, a “bad-bank fund”, funding of consumer debt, and foreclosure mitigation that may include the government picking up the tab for part of some peoples' mortgage payment - I'm not kidding. Each one of these bullet points requires the cooperation of the banks. Yet the Federal Government has infuriated banking executives by dictating what it thinks banks should pay their top people. This is a mistake and this non-stimulus act is mandated by the Spending Bill that will be signed into law on Tuesday.
Geithner’s plan won’t work. Aside from the banks separating themselves from government assistance, Geithner actually believes that private money will come in to buy bad assets. Wouldn’t private money have come in already if there was a market for bad assets? Of course, but Geithner is all but inventing a market where none exists, or claiming one exists that clearly does not.
Geithner’s banking plan may not have a chance. Since the banks are bound by the law described in the “stimulus” bill, and considering how furious they are about this law, it wouldn’t exactly come as a complete shock to see the banks pay back the money from the first TARP funds and dissolve its relationship with the government. Besides, the goal is to “get banks lending again.” I would ask, “To whom?” Banks expect to be paid back and with job losses mounting at historic rates, the American people aren’t in a position to borrow more money whether to buy a house or car or anything else for that matter.
Inflation or deflation?
The case for inflation is obvious. $5 Trillion (or more) over 10 years is extremely inflationary. It took Obama 4 weeks, including this week to accomplish the same debt level it took George Bush 8 years to reach. Don’t forget that the possibility exists for yet another “stimulus” package that might be deemed "necessary" that some economic experts are expecting. Trillions upon trillions are either going to be printed or bonds are going to be sold. All of this is highly inflationary.
However, what most people now realize is that what we’re experiencing is a crisis of credit. We’ve built this house of cards on a mountain of debt and the brain trusts in Washington keep piling on more. They seem to think they can force banks to lend but can they force people to borrow? Lending is a two-way street and our politicians forget that.
We'd prefer to sell government debt in the form of Treasury Bonds. Unfortunately, there may not be the bond market the government thinks there is. When bond investors realize that the government has issued more debt (backed by the taxing power of the United States) than it can handle, investors will flee the bond market. In other words, investors will sell government bonds. That is deflationary. There is nothing the government can do to stop this from happening, especially in this environment where not a week goes by where you don’t hear of tens of thousands of jobs disappearing, further weakening the government’s ability to tax the people of the United States (assuming it wanted to).
In these troubled times deflationary forces trump those that are inflationary, at least for now. That will most certainly change but at least for now and for the foreseeable future, the forces that are in place are that of deflation.
It is not my intention to give investment advice, only to tell you what I’m doing. Forget gold. There are strange things happening with gold and playing gold in either direction could be problematic. In order to make the best of a horrible bill, I’m going to short long term treasury bonds by buying the ETF (Exchange Traded Funds) TBT. Short selling an instrument means to “borrow” the instrument from a broker, sell it on the open market with the expectation that prices will decline. When that decline has reached a predetermined (by the investor) level, shares are “bought back” and returned to the broker for a profit. TBT is a double-inverse instrument that shorts 20-year treasuries. They do this by selling futures each day to an amount that is twice the value of the fund and rebalancing at the end of the day. That means the investor will yield 2% (theoretically) for each 1% decline in the bond market.
However, what most people now realize is that what we’re experiencing is a crisis of credit. We’ve built this house of cards on a mountain of debt and the brain trusts in Washington keep piling on more. They seem to think they can force banks to lend but can they force people to borrow? Lending is a two-way street and our politicians forget that.
We'd prefer to sell government debt in the form of Treasury Bonds. Unfortunately, there may not be the bond market the government thinks there is. When bond investors realize that the government has issued more debt (backed by the taxing power of the United States) than it can handle, investors will flee the bond market. In other words, investors will sell government bonds. That is deflationary. There is nothing the government can do to stop this from happening, especially in this environment where not a week goes by where you don’t hear of tens of thousands of jobs disappearing, further weakening the government’s ability to tax the people of the United States (assuming it wanted to).
In these troubled times deflationary forces trump those that are inflationary, at least for now. That will most certainly change but at least for now and for the foreseeable future, the forces that are in place are that of deflation.
It is not my intention to give investment advice, only to tell you what I’m doing. Forget gold. There are strange things happening with gold and playing gold in either direction could be problematic. In order to make the best of a horrible bill, I’m going to short long term treasury bonds by buying the ETF (Exchange Traded Funds) TBT. Short selling an instrument means to “borrow” the instrument from a broker, sell it on the open market with the expectation that prices will decline. When that decline has reached a predetermined (by the investor) level, shares are “bought back” and returned to the broker for a profit. TBT is a double-inverse instrument that shorts 20-year treasuries. They do this by selling futures each day to an amount that is twice the value of the fund and rebalancing at the end of the day. That means the investor will yield 2% (theoretically) for each 1% decline in the bond market.
With the passage of this so-called “stimulus” bill I believe the US Government has gotten itself in way over its head. I wrote last week that we can’t afford this and as you watch the prices of Treasury Bonds decline in the forthcoming months, you’ll see that the bond market will confirm this is a horrible bill Congress shoved down our collective throats.
