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Bailout Euphoria Waning Fast
World Affairs Brief
By Joel Skousen
2-21-9
 
The media was out in droves this week heaping praise on Obama for this first great victory. The Washington Post led off with, "Twenty-four days into his presidency, Barack Obama recorded last night a legislative achievement of the sort that few of his predecessors achieved at any point in their tenure. In size and scope, there is almost nothing in history to rival the economic stimulus legislation that Obama shepherded through Congress in just over three weeks." Nonsense. A one sided party juggernaut is hardly an historic legislative victory. There is nothing praiseworthy about it. Not only does it set a huge precedent of misusing government funds, but it isn't going to work. Markets around the world were not impressed either. Stocks dropped, more store closings were announced and layoffs continued. It has quickly become clear, as in the TARP program, that these bailouts have done nothing but widen the expectations for unlimited outflows of paper money and encourage people to line up for "their share."
 
Current recipients are already asking for more. GM and Chrysler are threatening bankruptcy if Congress doesn't add another $14 billion to their bailout. But, there simply isn't enough demand for all these models and brands of vehicles. Some are going to keep going down until they fail. But, now that the Congress and the taxpayers have started down this bailout path, they will feel obligated to even more bailouts just to "safeguard the public's investment." Auto parts suppliers now want a share too, asking for $18.5 Billion in aid. Where does it all end? Now that the proverbial foot is in the door, there will be no end to future deficits until something else breaks--like the dollar itself. Gold just surpassed $1000/Oz., a harbinger of the dollar's growing weakness.
 
Peter Schiff, of Euro Pacific Capital continues to warn that this is only the beginning. "The intense scrutiny recently paid to my investment strategy in the immediate wake of the financial crisis of the last six months [he lost money for his investors even though he correctly saw the mortgage collapse coming] has unfortunately obscured the central element of my larger economic forecast. The standard line has been that although I was able to predict the crash, in the form of the housing collapse and the credit crunch, my expected fallout of a weaker dollar and global decoupling has been proven false. However, this assumes that the crash has fully played out [He's right. It's still coming].
 
"In reality, all we have heard thus far is the overture. In 2008, the bubble economy that I had meticulously described years ago finally hit the pin that I knew was out there. The corporate losses, frozen credit markets and plunging home prices were the opening salvo in the unfolding economic crisis. However, the vast majority of air has yet to leak out of the bubble. As it does, the U.S. economic crisis will kick into a much higher gear [the commercial real estate shoe is starting to drop]. Thus far, our economy has actually been spared the worst due to the temporary strength in the dollar and the recent desirability of our Government's debt... The demand for U.S. Treasuries has led to one of the sharpest dollar rallies on record, which has helped bring about just as pronounced a decline in commodity prices. As a result, although consumer income has fallen, so too have prices and interest rates.
 
"The stronger dollar gives the Federal Government plenty of cover to pursue a policy of rampant monetary inflation in order to re-inflate the collapsing bubble. Even though the Federal Reserve has thrown trillions of new dollars into circulation, those dollars have actually gained purchasing power - contrary to economic law. This, along with inventory liquidations and going-out-of-business sales, has kept a lid on consumer prices. The continued, although misguided, appeal of U.S. debt has also made it possible for the government to garner cheap financing for its equally misguided and massive bails-outs and stimulus packages. In addition to cushioning the blow for us, the dollar rally has exacerbated the pain abroad. As money has rushed to our aid it has created a global credit crunch. The rest of the world is not only dealing with losses on toxic U.S. credit instruments but is also shouldering the burden of financing our new borrowing as well.
 
As foreign currencies have fallen, foreign consumers have not received as large a windfall as Americans have from falling commodity prices. In effect, Americans have been using these life-lines to pull the rest of the world into the stormy seas. However, there are signs that those holding the lines are about to cast them adrift. The dollar rally has run out of steam, gold has clearly broken out, and commodity prices are moving back up. 2009 is already the worst year ever for US. Treasury bonds and foreign stock markets are once again outperforming ours.
 
"This week President Obama claimed that failure to pass his economic stimulus bill will have catastrophic consequences for the US economy. The reality is the catastrophe will be far greater with his plan then without it. If the trends of January and early February of 2009 continue, the rug will be completely pulled out from beneath the U.S. economy, and the full cost of the President's 'economic depressant package' will be apparent to all. If foreign capital does not continue to pour into Treasuries, interest rates and consumer prices in the U.S. will soar. At that point, we will finally be confronted with the real crises that I have long predicted. When the day of reckoning arrives our policy response will be critical. If we continue on the course our new President has mapped out, the catastrophe will far exceed the scope of any he hoped to avoid."
 
 
World Affairs Brief - Commentary and Insights on a Troubled World.
 
Copyright Joel Skousen. Partial quotations with attribution permitted.
 
Cite source as Joel Skousen's World Affairs Brief http://www.worldaffairsbrief.com

 
 
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