Governments Suck

Credit markets are frozen except for a rarified few who can take advantage of government programs, buy a car funded by a car company, float their own paper or have incredible banking relationships. For most of us, well… borrowing is relegated to asking a neighbor for a cup of sugar. While there is a lot of equity (okay, a lot less than before the meltdown) looking for places to go, if its credit you’re seeking, you are probably out of luck.

Hear that “sucking sound?” It’s the noise governments make when they suck global credit into their mouths to build deficits to generate stimulus packages as a substitute for dried up consumer demand. Globally, we’re looking at trillions of dollars of governmental borrowing. In the U.S., Germany, the U.K…. and the list goes on. We know the obvious problem – we have to pay rising interest costs against bigger aggregated deficit – but there is another huge elephant in the room. The global lending capacity seems to be absorbed by governments leaving individual and corporate borrowers, when credit markets unfreeze, to compete for a smaller pool of capital available for private lending, paying higher interest rates, because the big governments have used up so much of the available lending pool.

For every point that interest rates for the U.S. government rises, another $50 billion gets added to our annual payout obligation. The June 4^th New York Times: “‘It will be more expensive for everybody,’ said Olivier J. Blanchard, chief economist of the International Monetary Fund in Washington. ‘As government borrowing in the world increases, interest rates will go up. We’re already starting to see it.’… Since the end of 2008, the yield on the benchmark 10-year Treasury note has increased by one and a half percentage points, rising to 3.54 percent from 2 percent, the sharpest upward move in 15 years. Over the same period, the yield on German 10-year bonds has risen to 3.57 percent, from 2.93 percent. And British bond yields have increased to 3.78 percent, from 3.41 percent.”

For corporate and job growth, the lack of private lending capacity – even the eventual cost of borrowing based on rising interest rates – adds an additional brake on longer-term “recovery” (whatever form that might take). Fed Chairman Ben Bernanke’s warning to Congress on June 3^rd address this threat of ever-spiraling costs to service our massive deficit. At the end of 2008, our net deficit represented 41% of our gross domestic product; by the end of 2010, that number should rise to 65%. People are also assuming that we will always be able to feed at the international debt trough.

But what if the world stops buying our debt? Do we look like California and destroy the government’s ability to provide basic services? Like Argentina in the hyper-inflationary days when a suitcase full of currency might buy you a cup of coffee? With all of this government competition from many nations, we know that the old law of “supply and demand” will make interest rates skyrocket as more nations compete for international loans.

All these numbers seem confusing to most folks. So maybe some overall observations of what might happen are worth considering. If our borrowing is relatively greater than that of other countries, the buying power of the dollar will fall; everything we import (like oil) will rise in price while everything we export with rise in dollar-generating capacity. Unfortunately, we import significantly more than we export, so the net cost is huge. Further, if you are an individual or a business, and if you need to borrow money for any purpose, you can expect interest rates to rise, maybe into double digits, across the board. Companies won’t be able to grow as fast, the cost of consumers goods that require debt (cars, homes, appliances, etc.) will rise, and that's a recipe for inflation.

So what do we do? Stop the stimulus package and let the economy tank for a decade? Tough issues, but anything that is in that stimulus package that creates long-term value, like paying for better schools or funding research, is more of solution than a cost. Creating programs just to please political constituencies may be politically necessary, but the long-term cost could have a devastating impact. In the end, it is incumbent on American voters to understand the choice and the ramification of those choices.

I’m Peter Dekom, and I approve this message.