The Promise to Pay
By Robert Romano
Ultimately, a nation's capacity to borrow money to finance government spending is based upon its ability to pay back those loans—the promise to pay. Increasingly, however, the United States' promise to pay is worth less and less the paper it's printed on.
And everybody, including foreign creditors, Congressmen, Senators, the markets, and the American people are taking note.
Today, for example, the Senate is set to vote on the $410 billion omnibus spending bill, as reported by Fox News. The bill was postponed last week after Senate Majority Leader Harry Reid (D-NV) failed to garner the 60 votes necessary to proceed to passage. It has already passed the house 245-178, but today's vote may ultimately fail.
But not because the omnibus bill represents the most egregious case of wasteful spending this year. Rather, the reason is because public faith in America's ability to pay back its amassed debts caused by such spending is faltering.
It should be interesting to see if Democratic senators currently making noise against wasteful spending invariably wind up voting to invoke cloture anyway on the nearly half-trillion dollar appropriations bill.
Truth be told, it remains to be seen if they are all talk. Will they put their money where their mouths are and vote no on cloture—and save the American some money for a change? We shall see.
The same report from Fox News states that the bill “includes an 8.5 percent across-the-board increase over last year and billions of dollars worth of pet projects.” That represents a $32 billion increase. True as that is, it hardly reveals the extent of the government spending binge that continues to threaten the nation's very solvency.
As ALG News reported last week in “Popping the Appropriations Bubble,” the same agencies and departments funded under the omnibus bill—which is really the annual budget that under normal circumstances would have been passed last year—received an even larger boost in the $787 billion “stimulus” spending bill. That represented another $680 billion for those entities.
Overall, the growth of the budget is more like 80 percent over the last year. And Congress has not even gotten around to appropriating the budget it is supposed to work on this year. And if they go by President Barack Obama's $3.6 trillion budget—which includes another $750 billion bank bailout—the deficit will swell to a projected $1.75 trillion for this year alone.
And that does not even factor in the over-$2 trillion financial “stability” plan—which is just another, even larger bank bailout—being proposed by Treasury Secretary Timothy Geithner. The only luxury the Administration may have there is that much of that will not even be factored into the annual deficit since the plan in its entirety will not even be voted upon by Congress.
The plan includes some $1 trillion for a “public-private investment fund” to price “troubled” assets; $1.1 trillion—$100 billion allocated and $1 trillion lent-printed from the Fed—for consumer and business lending; $600 billion for purchasing bad paper from Fannie and Freddie; and another $75 billion to give homes away to those facing foreclosure. Plus, another $200 billion for Fannie and Freddie to reduce interest rates and otherwise modify mortgages.
Meanwhile, investor confidence in the economy is reaching record lows as Mr. Obama recently revealed his budget. Not only because of profligate spending—but because it includes tax increases on job-creation, wealth-creation, and growth itself. He raises the capital gains tax. He reduces the mortgage deduction for couples making over $250,000. He raises the top income tax rate to 39.6 percent. And that's just the tip of a very large iceberg.
The greatest fear for investors is that it appears Obama Administration plans on financing his top-heavy Big Government borrowing, spending, and printing spree by those who might help markets to recover. In the process, an already battered system is likely to continue sinking.
Moreover, bailouts for “too big to fail” institutions are increasing as firms return just months after being bailed out to beg for yet more funds—AIG, CitiGroup, Bank of America, automakers, etc. If the Troubled Asset Relief Program were working, troubled insurers, creditors, and other financial institutions would already be safe. FDIC would not be asking for more money to replenish its depleted insurance funds.
If the TARP were working, shills for the same financial system and investment firms would not be racing to the airwaves proclaiming how “safe” everyone's deposits, investments, and pensions are. If it were working, the White House would not be making an emergency out of frozen spending levels from last year that a failure to enact the $410 billion omnibus would represent.
In sum, if all of this spending, borrowing, and printing of yet more money were working to pump cement under the sinking city that encompasses the U.S. economy, the American people would not be considering making TARP a permanent line on the budget—as Mr. Obama proposes in his $3.6 trillion budget to the tune of another $750 billion—instead of the temporary “investment” it was promised to be.
The truth be told, the $410 billion omnibus spending bill is not even the most wasteful item to be enacted this year. The already-passed “stimulus” may take the cake there, or perhaps the next installment of TARP, or some other unforeseen “emergency” spending measure. But, hopefully, it may be one that fails.
And the reason is because the American people take great concern when they are faced with the prospect of the Secretary of State groveling for more money to borrow from China to bankroll an unrestrained, undisciplined, and irresponsible government in Washington.
Confidence could be restored in short order if the Administration rescinded its current plans to explode the budget deficit, increase the national debt, and continuing bailing out institutions that should be allowed to fail. A willingness to invest in the American economy could be reinstated if government abandoned its plans to bailout delinquent mortgages and banks that were forced to make bad loans. If it stopped preventing mortgage-backed securities from being valued by market forces.
Simply put, if it got out of the way and declared that the bailouts were over once and for all.
And instead, proceeded on a path to retire the national debt, restore fiscal sanity, and reform monetary policy. The markets' eyes are wide open. They are watching to see if real change will be enacted in the way Washington does business.
Because, those markets—and the people—are losing faith in their government's ability, indeed, its promise to pay back its debts. And until that changes, promises to restore hope and prosperity will remain tenuous.
Robert Romano is the Senior Editor of ALG News Bureau.