Spending Bailout Dollars We Don't Have

December 11, 2008

(bettertrades) - With the auto deal hitting its latest snag, it seems the big three will turn to the one man who never fails to spend money he doesn't have: The President. Wall Street turned red after the auto bill broke down in Congress, but the President's track record suggests he will give the green light for federal spending to save the automakers, no matter the cost.

Fact: $99 billion in November bank bailout spending.

Roughly half of the $700 billion in TARP funds have been spent, yet systemic risk remains. If Congress fails to ratify the auto bill and the tab lands at the Treasury's desk, it seems likely that the automakers will be back for more in a few months after the initial $15 billion infusion. Some auto experts predict aggregate cash flow automakers will need could approach $100 billion.

Fact: The U.S. Government borrowed more-than $2 trillion in the third quarter.

And the bill keeps growing. AIG and Citigroup highlight what was a costly quarter for bailing out beleaguered banks, and there is no indication that they will be the last. The government financed their record spending through the issuance of Treasury securities as the demand for these instruments has been off the chart.

Fact: Treasury yields are hovering at or near all-time lows.

Despite spending without a cause, investors are still willing to invest in U.S. Treasuries. The 3-month bill has been yielding near 0% and some rates have even turned negative. This indicates the heightened level of anxiety in credit markets that make investors willing to park their cash in riskless assets earning no return, and in some cases at a fee.

Fact: The U.S. debt increased to $164.40 billion versus $98.24 billion last year in the third quarter.

Increasing entitlement spending for Social Security and Medicare, wars in Afghanistan and Iraq, and a slew of other expenditures had unbalanced the budget even before the economic meltdown, contributing to the exponential growth of the national deficit. Obviously, the recent turn of events is only speeding up the clock on what was already a ticking time bomb.

Fact: Federal revenues declined by 4.2% to $144.78 billion in the third quarter.

Slowing revenues have derailed the White House plan to balance the budget by 2012. Economic contraction has placed the current administration and the Obama team in a precarious position. Obama has already stated some of the programs he advocated for in the Presidential campaign will have to be delayed or purged due to the financial crisis. Economic instability doesn't look to be going anywhere, resulting in a ballooning of the already comical national debt. For certain, at some point the bill will come due.