U.S BUDGET DEFICIT TO BE CLOSE TO 12.5% OF GDP IN 09 AKA $2 TRILLION

if you think this crisis is just a blip on the radar like other bear markets of 87 and 01 then you are sadly mistaken. it's crazy to think prices in the market could get significantly cheaper if this downturn ends of being something like 1974. back then was when buffett loaded up and the p/e of the s&p 500 was somewhere closer to 7 than the current 13. even back in the 80 and 82 recessions p/e's of the s&p 500 were close to 7...meaning we could still have a way to go if things continue to get worse as it appears they will. many more train wrecks to come if action is not taken immediately to slow the implosion of the credit bubble. please watch the video to see some great commentary on this issue.

Spoiler

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http://www.bloomberg.com/apps/news?pid=20601109&sid=anUDEEEP1_M0&refer=home


Cost of U.S. Crisis Action Grows, Along With Debt

By Matthew Benjamin

Oct. 10 (Bloomberg) -- The global financial crisis is turning into a bigger drain on the U.S. federal budget than experts estimated two weeks ago, ballooning the deficit toward $2 trillion.

Bailouts of American International Group, Fannie Mae and Freddie Mac likely will be more expensive than expected. States are turning to Washington for fiscal help. The Federal Reserve said this week it will begin buying commercial paper, the short- term loans companies used to conduct day-to-day business, further increasing costs. And analysts now say the $700 billion bank- rescue plan passed by Congress last week may have to be significantly larger.

``I always assumed they would be asking for more money along the way if it was necessary, and it looks like it's going to be necessary,'' said Stan Collender, a former analyst for the House and Senate budget committees, now at Qorvis Communications in Washington. ``At the moment, there's nothing happening here that's positive for the budget. Nothing.''

The 2009 budget deficit could be close to $2 trillion, or 12.5 percent of gross domestic product, more than twice the record of 6 percent set in 1983, according to David Greenlaw, Morgan Stanley's chief economist. Two weeks ago, budget analysts said the measures might push deficit to as much as $1.5 trillion.

Yields to Rise

That means a lot more borrowing by Treasury, which will push up interest rates, said Greenlaw. ``The Treasury's going to be ramping up supply dramatically over the course of coming months to meet this enormous federal budget obligation,'' Greenlaw told Bloomberg this week. ``The supply will trigger some elevation in yields.''

Treasuries have fallen the past four days even as stocks sank, a sign investors are preparing for bigger U.S. government borrowing. Benchmark 10-year note yields rose to 3.82 percent at 7:49 a.m. in New York, from a close of 3.45 percent Oct. 6.

Payments the government allocated to keep vital companies solvent are beginning to look insufficient.

AIG, the giant insurance company that was taken over by the government in mid-September, said this week it may access $37.8 billion from the Federal Reserve Bank of New York, in addition to the $85 billion the government already loaned it to stave off bankruptcy.

``You're in for a dime, you're in for a dollar on this one,'' said David Havens, a credit analyst at UBS AG.

The financial health and earnings prospects of Fannie Mae and Freddie Mac -- seized by the government on Sept. 7 to prevent them from failing -- worsened in the second and third quarters, the companies' government regulator said this week.

Price Declines

The companies and regulators are recalculating the value of all of their assets to factor in price erosion. That may mean the government will have to spend more to keep the firms solvent.

Earlier this week the Fed announced it will create a special fund to buy commercial paper, the credit that businesses use to finance payrolls and other ongoing expenses. The Treasury will deposit money into the Fed's New York district bank to help set up the new unit. A Fed official said Treasury funding for the program could be ``substantial.''

California, Alabama and Massachusetts are urging the Fed and Treasury to include their securities in rescue plans designed for banks and businesses. The $2.66 trillion U.S. market for state and city bonds has been all but frozen since Lehman Brothers Holdings Inc., weighed down by losses in mortgage-backed bonds, declared history's largest bankruptcy on Sept. 15.

California has said it needs to sell as much as $7 billion in notes to maintain its schools, health system and other public services. The Bush administration said it is reviewing the states' financial positions.

Plan for Banks

Meanwhile, Treasury Secretary Henry Paulson indicated two days ago that he is considering buying stakes in a wide range of banks in coming weeks to help recapitalize them.

Such a move is allowed under the $700 billion bailout package Congress passed last week. Edmund Phelps, winner of the 2006 Nobel Prize for economics and a professor at Columbia University, said such action is necessary -- and will likely turn out to increase the measure's cost. Spending beyond the amount set in last week's bill would require further Congressional approval.

``We have to recapitalize the banks,'' Phelps told Bloomberg Television this week. ``I don't imagine that there's enough money in the first Paulson plan to be able to do all that needs to be done in that direction.''

The additional borrowing could push the national debt well past 70 percent of GDP, the highest since the immediate aftermath of World War II, when the U.S. was still paying off war debt.

Debt Limit

Gross U.S. debt, which includes debt held by the public and by government agencies, this year reached about $9.6 trillion, or about 68 percent of gross domestic product. The rescue legislation increased the government's debt limit to more than $11.3 trillion from $10.6 trillion.

On top of all that, budget watchdogs say the sheer size of the interventions is making Washington more profligate than usual. To attract votes in Congress, leaders added several costly items to the $700 billion rescue, including extensions of some tax credits and tax breaks for makers of wooden arrows and stock- car racetrack owners.

Under normal circumstances, there would have been more resistance to such expenses, said Robert Bixby, executive director of the Concord Coalition, a non-partisan budget watchdog.

The rescue legislation ``creates a mask for all sorts of fiscal irresponsibility,'' said Bixby. ``It covers up a multitude of sins.''

To contact the reporters on this story: Matthew Benjamin at mbenjamin2@bloomberg.net
Last Updated: October 10, 2008 07:55 EDT

 

I don't know and it can be pretty unnerving to think about what is going to happen if both parties continue to do nothing. both sides continue to blather about which side is worse but neither seem to be willing to actually attack the fundamental problems in america of wastefulness and incompetent planning. I know mccain certainly doesn't get it and I don't think obama does either. this time it is too dangerous to sit around and talk while rome burns.

I hate to sound melodramatic but the more I read and the more I think about the situation the more I realize that this going to result in a major restructuring of world economics. it almost doesn't feel real because it (abusive spending and debt) is such a large problem. hell I was just looking around at some "blue chip" companies today and I see good ole caterpillar (CAT) is infected with painfully high debt levels. they have 36 BILLION in debt and they only have a 24 BILLION dollar market cap now that their stock has been halved. their debt to shareholder equity is over 3 to 1...not good. ok i'll stop ranting now since I am typing on my phone and I am tired of writing.


p.s. really I am a much happier person in real life so don't take my ranting to be that of a pessimistic hater. but man it's just so hard not to get pissed off about this stuff.

 

http://perotcharts.com/challenges/

 

pay off debts and save money. it's as simple as that. fwiw i would also look to avoid the equity market for investments and look to bond funds/fixed income for your retirement accounts. i see the equity markets continuing to be mostly sideways for the next 5+ years. the future depends on how our government takes action with budget deficits and debt and how we deal with the collapse of the credit bubble as a society.