Tuesday, January 13, 2009

Thanks, Son

Dear Son,

I wish to thank you for a great gift you probably didn't even know you were giving me.

In 2008, the Federal Government committed a total of $8.5 trillion to the most massive bailout in history. Thank you, son.

You might wonder why I am thanking you?

Well, the government doesn't have a spare $8.5 trillion laying around. In fact, the Federal Government was already running a sizable deficit. So we will have to borrow that money and add it to the national debt. There is no way that we will ever pay off the debt, so you can count on paying interest on the money spent bailing out failed businesses for the rest of your life.

At a typical interest rate of six percent, this will cost $510 billion a year, forever. Your share of this cost will be $1,700 per year every year for the rest of your life, or $4.65 every day for the rest of your life. Odds are, you will be forced to pay more than your share, in the name of "fairness".

Like I said, Thanks.

It is good to know that we learned something as a nation from this fiasco. For instance, we learned that overextended debtors with a history of irresponsibility with money should not be taking out big 30-year ARM loans with no money down and no idea of how they are going to make the payments. Which is why our government, a model of financial irresponsibility, already saddled with more debt than they can ever pay off, is borrowing $8.5 trillion more. But if the government ever gets into real financial trouble, they can always just print more money to pay their way out of the problem. If you did that they would throw you in jail. When the government does that, it drives up prices and devalues your money, your life savings, and your income.

It's also good to know that government has learned their lesson about meddling with the free market. Their policies, starting with Jimmy Carter, strengthened under Bill Clinton, and continued under George Bush encouraged mortgage companies to loan money to uncreditworthy borrowers. Government chartered organizations, Fannie and Freddie, guaranteed hundreds of billions of dollars of risky loans, packaged them up and sold them as highly rated mortgage securities. So now the solution is for the government to nationalize vast additional portions of the financial industry, buying up failed insurance companies, mortgage companies, and banks which are in such bad shape that no one else would touch them. But it's all ok because we will just pass the bill on to you. By privatizing the profit and socializing the risk, we are sure to encourage companies to make prudent decisions in the future, certain that if things go badly the government will be there to bail them out.

I have taught you how to budget your money and account for what you spend. At any time you can tell me how much money you have and account for every penny of your allowance money. You carefully set aside saving money for long-term purchases. It is good to know that the politicians who have made a career out of using our money to buy votes, favors, and influence, are sure to be at least as careful with your money as you would be. As a matter of fact, they can't say exactly what happened to the first $350 billion that they passed out.

So when Harry Reid, George Bush, and Nancy Pelosi lecture the auto makers on how the Government will demand financial responsibility and accountability as a condition of the auto industry bailout, maybe they ought to start by getting some for themselves. After all, it is not their own money that they are dishing out like candy on Halloween. It's your money and your future.


Your Dad


The Donald said...

In my lifetime, I've often heard the question: "How could someone like Hitler rise to power in Germany. What were the people thinking?"

The answer is probably more complex than can be quickly explained here, but it's generally accepted that the Treaty of Versailles sorely chastened a diminished Germany, and saddled it with debt. While this did not make Hitler's rise inevitable, it certainly created a favorable environment for a gifted orator with nationalistic designs.

With the tribulations facing the United States, pray that a charismatic, gifted orator does not rise to power...

David H said...

Many lawyers are by necessity gifted orators. I've heard what I thought were fairly intelligent people talk about Barak and say how intelligent they think he is. So far all I can be sure of is that he has talented speech writers and he is skilled with a teleprompter.
During the McCain campaign, I sent them a suggested slogan: "Would you rather have a leader that can handle a terrorist or a teleprompter?"

The Donald said...

I am trying to read up on Argentina, as I remember they had terrible hyperinflation from the mid-'70s forward.

It's a very interesting situation, and I fear we are headed in that direction. One thing for a second-tier economy to have H-I because of ballooning debt relative to GDP, quite another when it's the world's largest economy. From what I've read so far, the prescription is usually to peg the currency to a larger, stable economy's (in the past, the dollar). But in the post- Bretton Woods era, and with the fiscal irresponsibility of our Congress, the currency has gone to heck in a handbasket - just look at the Euro ratio (and Europe is in a recession, too) in its few years.

Unfortunately, it's hard to know what to use as a store of value. One would say land, but that can be nationalized/expropriated. Never really cared for the goldbugs, though it is the standard in times of turmoil.

Again, it's all very interesting.

Don Dodson said...

There are many ways to hedge against inflation. Gold, as you mention, is one of the most obvious. But like you I want an investment, which means a working asset, not just a store of value.

TIPS might be another way to hedge against inflation. But these days they don't pay any premium over inflation, and some people have less faith in the "Full faith and credit" of the US Government right now.

If you are concerned mainly with American currency, investing in assets denominated in other currencies is an option. That would mean foreign stocks or bonds, perhaps in mutual funds which do not hedge for currency.

Stocks in general are a fairly effective hedge against inflation because the price of the company's assets also increase, along with the revenue generated from their higher-priced products.

Essentially, to reduce the impact of inflation you want to own stuff rather than money. Gold is "stuff" and so is a company. The difference is that gold just sits there, while a company hopefully is using its assets to create more wealth, and as a shareholder you own a part of that newly created wealth.

todd said...

I stuck a crayon in my nose today. Does that count for anything?

The Donald said...

Depends on the color, Todd...

The Donald said...

One crayon or two? And, if two, did you at the same time say "I am the Walrus"?

The Donald said...

**Odds are, you will be forced to pay more than your share, in the name of "fairness".**

Yes, the odds are excellent, especially as we move into the peak of the retiring 'baby boomers' and fewer and fewer worker bees support more and more non-worker bees.

It's an interesting conundrum to be a libertarian/conservative. Typical libertarianism supports unfettered immigration ("free minds and free markets"). While this is correct in priciple, the ascendant socialist state cannot continue to sustain the droves who cross our borders. It's kinda like throwing a party where lots and lots of folks fail to RSVP, and even though you've padded your food and beverage numbers, so many people show up that you run out of refreshments.

The obvious answer would be to throw off the shackles of the socialist state before we're fated to serfdom. But, as the old story about the frog and boiling water teaches, we've been gradually headed down this road since 1935, and our frog is gonna get boiled.