03.31.2010 0

The Painful Cost of “Stimulus”

  • On: 04/21/2010 09:49:47
  • In: Economy
  • By Bill Wilson

    Apparently, everyone in the world is worried about rapidly increasing sovereign debt except for Barack Obama and Timothy Geithner. Yesterday, the International Monetary Fund (IMF) issued a stark warning that unprecedented deficit-spending throughout the world to cope with the recession could trigger a “new phase” in the financial crisis.

    According to the IMF’s Global Financial Stability Report, “Careful management of sovereign risks is essential: governments need to design credible medium-term fiscal consolidation plans in order to curb rising debt burdens and avoid taking the credit crisis into a new phase.”

    Except the U.S. is not doing that at all. In fact, there is no plan to “consolidate” anything in Washington except for power.

    Instead of reining in the fiscal house, Obama has presented a ten-year budget that will add more than $10.6 trillion to the national debt the White House’s own estimates. It will be even more than that, if the Congressional Budget Office is to be believed.

    When Obama & Co. presented the $787 billion fiscal “stimulus,” it was under the premise that in order for recovery to take root, a liquidity boost was needed to get credit moving again. This was coupled with the $700 billion Treasury-administered Troubled Asset Relief Program and the Federal Reserve more than doubling the money supply since the crisis began in 2007.

    Other Fed programs, which take place off of the nation’s balance sheet, on behalf of the economy have included the purchase of $300 billion in U.S. Treasuries and $1.25 trillion of mortgage-backed securities.

    Atop these efforts, government has taken over GM, Chrysler, AIG, the health care system, and now is setting its sights on the financial system, which will include permanent taxpayer assistance to big banks. As reported by Politico, even Democrat Congressman Brad Sherman has described the takeover as such: “The bill contains permanent, unlimited bailout authority.”

    So, while the rest of the world is trying to figure out how to pay the bills not wishing to undergo a similar experience as Greece, the U.S. is tempting fate.

    Greece, as we know, hid almost €50 billion of debt from its balance sheet, which was revised from €251.2 billion at 99.6 percent of the nation’s GDP, as Greece’s National Statistical Service reported in May 2009, to about €294 billion at some 116.5 percent of GDP that it will top this year, as reported by AFP.

    As reported by Dow Jones Newswires, Jose Vinals, director of the IMF’s monetary and capital markets department, said Greece should be a “wake-up” call for other governments. But it’s not a “wake-up” call in the U.S., which is hiding some $1.6 trillion in Fannie Mae and Freddie Mac’s corporate debt, and $4.7 trillion of its mortgage-backed securities from the total U.S. debt.

    For now, that debt is said to be $12.8 trillion (although it is rapidly rising), but if these $6.3 trillion in liabilities were added, it would be well over 100 percent of the Gross Domestic Product at $19.1 trillion! If these debts were brought on to the nation’s ledger — as they should be — there would, in short, be hell to pay.

    And the government knows it. So instead, it is playing a shell game to pretend that the government is not backing Fannie and Freddie, while offering explicit taxpayer protections. Already, some $129 billion in on-balance sheet taxpayer funds have been required to keep the GSE’s debt obligations fully funded. How long this charade lasts is anyone’s guess.

    It’s akin to the scrawny little kid that dies sniffing glue, and his bigger brother justifies continuing to sniff glue under the premise that he does it behind his mother’s back.

    Vinals says time is running out to get for nations to get their fiscal houses in order. “Now that there is time, it’s very important that these emerging sovereign risk concerns are addressed through appropriate policy action, precisely in order to consolidate financial stability.”

    In other words, the alleged solution to the financial crisis, deficit-spending, printing more money, and taking on more credit, is actually making the problem worse.

    The cure is the disease. Vinals noted that “stimulus” would have to be removed sooner than planned because markets are already pricing in the spiraling costs of perpetual government debt. Apparently, the risks associated with sovereign debt accumulation far outweigh any potential or perceived benefit.

    Someone needs to write a note to Barack Obama and Timothy Geithner. Before it’s too late. Despite all of the evidence of the risks involved, the Administration remains committed to spending the nation into bankruptcy under the belief that it will improve the economy in spite of a lack of any tangible evidence that the “stimulus” is even working. Instead, all they have is faith in their own infallibility.

    Bill Wilson is the President of Americans for Limited Government.

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