Borrow, buy, burn, bail out

With the United States election just around the corner, who’d want to be in the shoes of either front-runner Barack Obama or John McCain? Whoever wins next week will arrive in office with an almighty mess to clean up.

The budget deficit, pushed in large part by George W’s misadventures in Iraq, is at record levels, at $455-billion. Consumer confidence is at its lowest since it first measured in 1967. Bail-out spending grows by the day. Twenty-five large banks have received $159-billion with thousands of smaller banks also to receive taxpayer money.

The insurance companies are also to be bailed out. Transit companies want government money, as do two of the world’s giant car companies, GM and Chrysler, to pay the costs of a merger, which hopefully will prevent both of them going broke.

The banks got the bail-out so that they would start behaving like banks again and lend to one another. But The New York Times was able to listen in to an internal briefing, hearing a JP Morgan executive say the bail-out money would be used to buy out other, weaker banks. Viva the taxpayer!

A curious aside to this story is that the McCain/Palin camp has been trying to stick a socialist tag on Obama even while the current Republican administration is nationalising the economy on an unprecedented basis.

Meantime, recession is starting to bite. By one estimate the US economy will shrink by 2% in the fourth quarter. The tax take is likely to be down, while there is general consensus that the next president will have to implement a major stimulus package to ease the worst effects of a recession.

And that’s not the end of it. Queues of emerging market countries are forming at the International Monetary Fund (IMF) to get finance, so much so that the $200-billion which it has will soon be depleted. A report in the Financial Times this week suggested that the IMF may need $2-trillion to be able to meet its mandate as a lender of last resort to countries in need.

George Soros called on the US to lead a bail-out programme for emerging economies. Expect the IMF to be tapping its shareholders such as the US, soon, for funds.

The experts tell us the US budget deficit, the difference between taxes raised and money spent, will hit $1-trillion next year.

This is about 7% of gross domestic product, more than twice the 3% level considered to be prudent. Both Obama and McCain are promising tax cuts and increased spending (McCain more so than Obama according to non-partisan analysts), so neither candidate is looking for extra taxes to run down the deficit.

Assuming that the world does not lose its appetite for US treasuries, the cost of servicing a $1-trillion deficit will be about 4% or $40-billion a year, according to one analysis I came across. This is about $133 a year for every American or $300 for every taxpayer.

But perhaps the real challenge for the next president will be to think differently about how we got here.
Speaking at a recent conference, noted venture capitalist John Doerr characterised the American economy as borrow, buy and burn.

He could have added bail out. You have to borrow to fund the bail-out. And so the cycle starts again.

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Kevin Davie

Kevin Davie is M&G's business editor. A journalist for more than 30 years, he has worked in senior positions at most major titles in the country. Davie is a Nieman Fellow (1995-1996) and cyberspace innovator, having co-founded SA's first online-only news portal, Woza, and the first online stockbroking operation. He is a lecturer at Wits Journalism. In his spare time he can be found riding a bicycle, usually somewhere remote.

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