Stimulating Comments: Ben Bernanke on Further Bank Bailouts

January 13, 2009 · Posted in Weekly Posts · Comment

Our national debt is heading higher and the pressure on the dollar is getting worse (despite recent strength). This morning Fed Chairman Ben Bernanke, speaking from a prepared text in London, stated that more bank bailouts would be needed in addition to the stimulus package that is heading to congress. While we are not surprised that there is more stimulus required – more on that in a later post – the fact that the Fed is telegraphing the need before the first package is even passed reinforces our view that the global credit crisis continues to develop at a pace faster and deeper than most expect. Our leaders remain behind the curve on getting control of it.

Also of note is Bernanke’s comments on the stimulus package itself. He stated (as reported by CNN) that the $800 billion plan being discussed “could provide a significant boost to economic activity.” The key word is could. Could is not at all reassuring nor should it be. The fact is there is very little evidence of the measured cause and effect variety that demonstrates that a stimulus on this scale could be spent fast enough, efficiently enough, and productively enough, to actually turn the economy around. Japan spent massively on public works projects for over a decade and still remained trapped in a struggling economy. The US has moved far faster than Japan in addressing the credit crisis but still, proof that this will work is lacking. Our leaders and investors are going purely on faith.

For investors this means that our national deficit this coming year will not be the $1.2 trillion number that CBO has projected without the stimulus package (nearly 8% of GDP). Nor will it be the $2.0 – $2.2 trillion that the stimulus package is expected to add (nearly 13% of GDP). It will in fact be something rather greater. Let’s go out on a limb and suggest $3 trillion as a nice round number. That would be around 19% of GDP.

That’s a lot of bonds to sell. Farewell the dollar….