Capitalism Is Being Blurred With Socialism, It’s Make Or Break Time

The AIG (AIG) situation is a perfect example of the types of problems that are created when the line between Capitalism and Socialism is blurred. AIG recently paid out $165mm in bonuses to individuals after taking taxpayer bailout money. As one could imagine, this creates a huge public outcry. The public cannot comprehend how this could actually happen. I have to agree. The government, as a result of bailout funds, has now become involved in overseeing the day to day operations of many of the largest financial institutions in the country. It’s a farce.

The integrity of the public capital markets has never been more in question than it is right now. With the mounting public and private debts, inflated balance sheets, and declining earnings as a result of the over leveraged consumer, it has become make or break time for the American economy. Unfortunately, I think it’s already broken.

China, which has been the sticky glue that has been holding the world economy together is now starting to sputter. The major economic engine is not insulated from the lack of US consumer expenditures. Chinese Treasury bond purchases have permitted the rapid expansion of credit in the USA. Now that their economy is starting to slow down, so is the growth in their reserves and also their purchases of US Treasuries.

The state budget problems will only get worse. California recently reported that the original budget deficits will only grow larger as unemployment grows and receipts slow even more than originally projected.

The recession has created another $8 billion hole in California’s budget, the Legislature’s budget analyst says in a new report.Despite a budget deal last month that was meant to close a $42 billion deficit, the Legislative Analyst’s Office projected Friday that state leaders will have to find new solutions as state revenues continue to fall. The report says the additional gap will be $6 billion in the new fiscal year that starts July 1, plus $2 billion that is needed for a cash reserve.

Unless Gov. Arnold Schwarzenegger and lawmakers take action, analyst Mac Taylor says the deficit will grow to $12.6 billion in 2010-11.

Taylor is recommending the state save as much federal stimulus money as possible.

States are starting to talk more about their municipal pensions and retirement plans. The actual returns coming in on investment portfolios are far inferior to what was originally projected. This shortfall will put additional pressures on cities and towns to increase taxes and/or employee contributions to their retirement programs.

Quantitative Easing is a joke. The FED and the US Treasury has embarked on a last ditch attempt to prevent anarchy in our society. They’ve given their strategy a scholarly name “quantitative easing”. It sounds like it’s something that you might learn at one of the higher institutions of learning….Harvard, Yale, Princeton or perhaps even MIT.

What is quantitative easing ?

It’s huge inflation of the US Treasury balance sheet. Essentially we’re doing the same things on the public level that created the problems on the private level. That’s it in a nutshell. We’re borrowing like there’s no tomorrow from the American taxpayer. With this rampant borrowing the taxpayer is getting IOU’s in companies that are basically insolvent. It’s total insanity. It’s no different than the banks and mortgage brokers loaning funds to homeowners that did not have the means to repay it.

Take a look at this recent snip from a Reuters story about China’s concern on US solvency

LONDON (Reuters) - What is more remarkable, that the premier of America’s largest creditor publicly raised concerns about U.S. creditworthiness or that the market took the news so easily in its stride?

“We have lent a massive amount of capital to the United States, and of course we are concerned about the security of our assets,” Chinese premier Wen Jiabao said on Friday at a news conference to close the annual session of parliament.

“To speak truthfully, I do indeed have some worries. I would like, through you, to once again request America to maintain their creditworthiness, keep their promise and guarantee the safety of Chinese assets.”

Can’t be blunter than that; the Creditor-in-Chief at the top of the country whose foreign reserves include about $1.4 trillion of U.S. dollar assets is now fretting that he won’t get his money back and is talking about “promises” and “guarantees.”

The quantitative easing is now pointing to the purchase of Treasury Securities. Think of the absurdity contained in that statement. The US Government is buying their own debt… with what ? How can this be. It can’t. It’s smoke and mirrors and lies. Folks - Can you repay your own debts with money or funds that you don’t have ? NO. Then, I ask, how can the US Government embark on a program of purchasing Treasuries. They’re issuing new debt and buying it - If this doesn’t sound like a massive Ponzi scheme, then I need to be committed.

The systemic risk in this market is huge. It’s totally being underestimated by the capital markets. The idiots on CNBC are talking about how stocks are so “undervalued”. Are you kidding me ? On what basis are they undervalued. They’re comparing price levels of stocks, but the game has changed and there’s not any adjustments being made for the huge level of risk that is now in the system as a result of all the government borrowing. It’s difficult to say anything about valuation in this environment.

Financial stocks represent such a large component of the major indexes and nobody has any idea what any of these companies are truly worth. It’s true. Valuation has never been more opaque than it is right now. Factor in the municipal issues and the Federal budget issues and the valuations become even cloudier. We are in a truly uncertain environment. Most people are not adjusting for this - I think equity valuations have much further to go on the downside.

We need to understand what things are worth and then find out, who actually has money to pay for this stuff, other than the US Government (via printing money). The current situation is putting Capitalism into question. If these valuation issues cannot be resolved, then anarchy will reign and a new political and economic structure will arise from the ashes.

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Comment by mario cavolo

2009-03-19 02:32:00

Great comments…and yes, the market trend is UP not what it SHOULD be…Thanks again

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