The US Government Is Too Big To Fail; It’s Just A Matter Of The Consequences Of Not Failing

The only thing too big to fail, apparently, is the US government because as long as it back-stops the egregious behavior of Humungous Bank & Broker (HB&B), the Fed will continue to print money, diluting the value of that money of course, but that’s not the Fed’s main concern. What would we do if the U.S. government failed?

In order to stay in control, government in the U.S., has recently taken control of the auto industry, the insurance industry and, soon to come, the healthcare industry. The number of industries that government in the U.S. has taken over now is phenomenal when you think of it, including the industrial-military complex they staff with troops that of course need weapons, house mortgage industry, the postal service, even schools, which is not a federal mandate. The list is endless.

Now more than half the states in the U.S. are insolvent, which is another take-over in the sense that without Federal aid (and strings attached), these state governments would have to shut down.

Should the U.S. government fail, I believe anarchy would be the next stage. I cannot fathom that; so I think the government, no matter how big, will not fail. It’s just a matter of the consequences of not failing that we also have to consider.

I am thinking of this today a bit more than usual for two reasons.

As a rule, government cannot do anything as effectively or efficiently as a well-regulated private sector. Today Neil Barofsky, special inspector general for Treasury’s financial sector rescue, aka sigTARP, has reported on the hidden costs to the taxpayer for bailing out HB&B and many of their biggest associates/clients. The paragraphs at the end under the “political distrust” heading should be re-read. The CNNMoney.com writer makes a good point but has omitted reference to financial system and capital market system distrust, which I suppose would be an endless discussion.

http://tinyurl.com/yh5s9n5

I am also thinking that the Fed, which printed this money, only to see the majority of it not go to bank lending where it was intended, but to buying up shares in the equity market, which Treasury thought was not such a bad thing as sales of shares at higher prices yield taxable profits, now must realize the jig is up. If mega billions of dollars sloshing around in the hands of speculators are not soon taken back, the Fed knows that commodity prices will get right out of control, with prices of consumables like oil soon bringing on price inflation. At that point, interest rates, which have been kept artificially low in order to help HB&B recover, will have to be lifted, and sad to say the Treasury, i.e., the US taxpayer, could not afford it. So, cut off the funding at the top and all those programs that are dependent on it, like the military, the state governments, and on and on, would shrivel up. Yes, the U.S. is one step away from anarchy if that top level funding is ever cut off.

So, given that the Fed now must go back to HB&B and pull in the money they have lent to speculators, the inevitable will happen. Capital market prices will fall. Remember, the choice is a market pull-back or anarchy.

I think Ben Bernanke let us know a week ago that the tightening was going to happen. I said at the time that if you trust the man for being good on his word you don’t want to be in the equity market.

A couple weeks ago, when the S&P 500 (^GSPC) was 950, I opined that a pull-back of 100 or 150 points would shatter the confidence of investors. But, 150 points shaved from 1100 puts the market back to 950, where it was on July 20, exactly 13 weeks ago. My how time flies!

My point is that investors would accept a re-set of just 13 weeks (the S&P back to 950) if that will help the Fed stave the inevitable interest rate rise. But, if it happens, are you protected? Do you have tight stops? Have you lined up your stock sales and put buys? If you haven’t done that by now, you have put your portfolio at risk.

Wealth management is foremost about risk management. I call it Job #1.

Subscribe by RSS Subscribe by Email