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In reply to: kahuna1 on Thursday 17/07/08 09:47am

FREE MARKET AND CAPITALISM IS THE BEST PATH FOR AMERICA........ http://www.sharescene.com/html/emoticons/lmaosmiley.gif


they must be learnt alot from Chines Gov. for how to manage economy.....LOL.....


Benny ---the comunisterrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr!!


but, as Dan tought me once--"make hay while it's sunny"!!!



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The more I think about this ....


the more stunned I am.


Time line is Fannie Mae and Freddie in trouble ... Paulson makes noise over the weekend to save them and even more noise on Monday.


Tuesday the stocks NY time fall even further 25%.


So late Tuesday night NY time the SEC now makes it illegal to be short the stocks ? After the market rejected plan A and Plan B and Plan C ....


If all else fails change the rules and make anyone with a short position take the stock back and those who were thinking of selling just pull the offers as they know within 7 days they have to buy it back... the shorts despite the fact its crystal clear these two are broke .



Thats what happened last night ... NY time.



Thing is with either Fannie Mae or Freddie Mac ... I honestly am not sure they ever should have been private since they enjoyed and enjoy a semi govt official status ... their bonds are basically guaranteed just like US treasuries . Whilst I think if things were ruled off right now the losses would be well over 100 billion and likely 300-400 billion ... if they continue in current form with a govt guarantee on their borrowings they just raise the rate they charge banks to take home loans and bundle them and sell securities to the market. Might take 20 years to make back the idiocy of the last 10 years and especially the last 5 ... but in effect the share price of either Fannie or Freddie never has mattered either way. Bottom line is however the business as its stands now ... is broke and negative anything from 100 billion to 500 billion. So the only choice is the govt to take it over anyhow. It bloody guarantees the bonds anyhow so its no difference.


However this latest move .... make a lot of noise ... market ignores you ... make more noise market sells it off ....


So they then change the law ?



Lot of people ... well intentioned making noises its all the hedge funds fault or whatever .... being an old FX dealer from pre float days ... when our currency went from 90 cents to 60 cents it was all the naughty FX dealers fault. Truth be told even if every bank in Australia had the same position it amounted to about 10% of the FX exposure of a large exporter like BHP or AWB at the time and blaming someone is typical at times like this. Keating called us Cowboys ... I actually purchased cowboy boots to wear to work :}


Classic this move by US authorities.


Does it matter if Freddie or Fannie trade at 2 cents ? No.


End of the story is ... maybe it goes on as is for a while but NO profits for at least 20 years.


Business as such does not work without the US govt backing and never really has.


Such a childish move to make short selling illegal .... are they trying to piss people off and investors off ? Certainly the results of Wells Fargo last night were better than expected but its a lone ship out in a sea of red ink. One investment bank fared better than most others Goldman's since it was short the paper it was selling its clients ....


This move has clouded the issue but suspect the shorts all squeezed to death last night and the market drifts back to point one in the next few days.


Drifts back with less people amused than before.


Quite amazed the consensus is now unilateral that the US fed keeps rates at 2% till 2009 .


Me I am I suppose in agreement that they do ... but sadly I suspect bad things continue to happen as US fed funds at 2% vs US CPI now at 5% ... and it rises to 6% and 6.5% and I am already agog the 3% minus rate offered to investors .... let alone Minus 4% real rate or Minus 5% if CPI hits 7%.


Our market and Japan and the rest of Asia treating the one off ... and it is a one off move or stunt the USA pulled .... largest one month rise in CPI since 1982 ... 26 years and the US market goes up ?


I suppose if you dont allow companies which are bankrupt to declare bankruptcy.

Fannie and Freddie cant go broke but their days as a publicly listed entity which enjoys the govts credit rating when the thing is minus 100 billion equity are over. Sure if they keep going with the same govt guarantee the thing continues and is worth money as an ongoing business but the current listed one ? Its broke ....



Don't care what inflation is.


Change the rules if people don't like the news you serve them .....


Amazing world we live in right now. All of it outside my 25 years full time experience and outside even the generation before me and one has to go back to 1929 to even come close to what is going on.


Until these things are fixed and not wallpapered over as time and time again they attempt to do as each new level of the crisis and fraud and idiocy is revealed it has not a hope of getting better.


Not admitting a recession ...


Not admitting even inflation till the first whiff last night and they ran out of seasonal adjustments ....


CPI officially up at 5% now I wonder what deflator they use for the GDP surely not the 2.5% one they managed to use in the past. CPI is 5% ... Deflator should be 4.8% or so .... meaning GDP outlook is 2.3% worse than they thought.


maybe they do have a recession they admit to after all.


Seems inflation finally hit ... only too petrol prices up 50% ... and a loaf of bread up 35% to move the CPI from 4.2% to 5% so far.


Taking yet another break.


Pointless to even contemplate this market and short term direction other than just wait till either it represents the likely new scenario of rampant CPI inflation and the problems this causes for mainstream business and the financial side ... god where do you start. Mono-line insurers being declared what they are might be a start. Followed by Fannie and its mate being nationalized since they also are the same ....


Unlikely all of it .... the petulant childish schoolyard bully ... it will not make tuff decisions regarding facing up to realities. Tax changes are needed. penalties for rampant fraud and greed .... changes needed to US spending and debt ... you cant consume 110% of what you produce forever and borrow the rest ... if it was 110% it might be nice its approaching 115% right now.


I agree with the gent yesterday there are some companies yes very cheap at the moment, but overall when you have a company rally 40% which is in fact broke and change the rules making someone who was short pay $15- for something worth minus $100- if you dont count the free credit card from the US govt ... its most certainly a system gone nuts.


Either way ... CPI as I suspected higher making negative GDP more likely ... i think we all knew that .... however when the market does not reflect the real risks overall and it doesn't despite some stocks being insanely cheap others are hiding behind a smokescreen and until the smoke clears ....


I hide.


Risk rewards despite being here are not good and a glimpse at the real colors of the underlying side of the whole financial system in the USA in the last 2 weeks has not been pleasant and even a reasonable person would question the current stunt.


Back under my rock .... they can run ... they can hide ... they can frankly change the rules all they like .... Until the marekt refelcts even close to the overall real risks it snot time to buy.


Back if something changes ....



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In reply to: kahuna1 on Thursday 17/07/08 02:01pm

Lot of people ... well intentioned making noises its all the hedge funds fault or whatever .... being an old FX dealer from pre float days ... when our currency went from 90 cents to 60 cents it was all the naughty FX dealers fault. Truth be told even if every bank in Australia had the same position it amounted to about 10% of the FX exposure of a large exporter like BHP or AWB at the time and blaming someone is typical at times like this. Keating called us Cowboys ... I actually purchased cowboy boots to wear to work :}



K1: As a newcomer to SS I can't tell you how refeshing it is to have somebody contributing who has been at the coalface as any OPERATOR, Forex is even better.


Over the years I have become very jaundiced by all these un-informed (to my eyes anyway) throw away comments of relative newcomers to stock markets blaming the coal face boys such as yourself, stockbrokers, merchant bankers, etc whilst in fact the diabolical situation we face now is mainly the effect of stupid or conniving politicians.


I know more about the broker side of things, and those brokers that I do know personally are extremely concerned for the wellbeing of their long term clients, they have been operating/recommending/advising with the best of intentions some of them for 30 years, and I imagine its very difficult to explain "WHY" things are the way they are, many have been recommending going to cash for some time but many recent retirees wont have a bar of cash, or wouldnt.


Keep telling it THE WAY IT IS, PLEASE.

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In reply to: kahuna1 on Thursday 17/07/08 02:01pm

Keating called us Cowboys ... I actually purchased cowboy boots to wear to work :}



still got that boots K??

you might need to put it on again, Megan will be really impressed that's for sure! http://www.sharescene.com/html/emoticons/lmaosmiley.gif


soon or later market will be fed up with these kinda Gov intervention i guess.


i'm stupid enough to believe 'free market..'

now i learnt that 'there is no such thing"!


market either been manipulated by the big sharks, or by the Gov.


that's why i shift my focus more on the events than charting.


as for Freddie, Fannie, i guess they will be oprating while they are broke{technically}. because US gov. allows them. they will be able to earn their way of it, whether it will take them 20years or much shorter time .....that is anyone's guess.


we will see their earning report soon enough, then we can have some sorta gauge....


thnanks k

love your lines!!





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QUOTE (kahuna1 @ Thursday 17/07/08 02:01pm)

Sorry Kahuna, I meant to reply to your post by creating a new topic rather than repeat all the above. Unfortuneately I have created a new thread titled Shorting on the USA.


Anyway , I just cannot believe this non shorting stuff.


Would you be able to reply on my new thread please. Look forward immensely to your views.Ta

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In reply to: early birds on Thursday 17/07/08 04:07pm

Hi Eb ...


Yep still got the boots :}


Megan loves them !!


Wish I knew where this all ends and trying to keep up with the goal postest being moved every second day is becoming tiring.


Eventually markets reach a point where the selling is exhausted and the equity prices reflect something the other side of fair value and overall are positivly cheap. Sadly when you tinker and not allow things that should be declared banrupt to go bankrupt .... mess with the fabric of the market time and time again ... as Rogers said putting a band aid on a cancer patient and patting them on the head and telling them to take 3 asprin and all will be OK ....


The bottom or at least traditional signals for what I see as a bottom are not clear.


We need some serious sort of panic and if the third largest bank fail in US history has the marekt actually up ... not down on the week ....


What bloody hope have we got ?


Well at least the way i operate at least. Trying to get to a point where the answer to the question ?


Are we there yet ?


Are we there yet ?


Are we there yet ?


Is actually yes.


To me and just one mans opinion ... not allowing a natural flow ... however ugly it may be. not addressing the cancer the patent actually has ....


the bottom is Months away if not longer.



What got the US financial side in such shocking state is unchanged and what got the US Fiscal policy and state of govt overspending so bad is unchaged as is the consumer/corporate debt same sort of story and as is the US trade balances.


Any change to a single one of these problems would be welcome .... even an attempt would be nice. To date 10 months into it ... solution is more of the same ... increase and already bloated US govt debt side, protect the vultures , you cant sell the vulture investment banks short ?


From the perspective of someone who missed the dot com mania and missed the current mess ... its all quite interesting at these times to sit on your hands.


I become like a crow ... i did in 2001-2003 and picked the eyes out of dead things. Pick and choose which bloated and apparently dead and discarded stock looks best. Suppose its the same thing here and however tempting some things looked a few weeks ago .... they are even tastier right now and I suspect we see them even lower.


Cycles and normal market cycles are one thing .... untill the market actually respects risk and has a cow and it aint happened yet and the market is dead and all are preaching the end of the world ... thats when its a lot safer and wiser to buy.


Here ? Are we there yet ?


Gee no sniff of fear out there.


Paulson and Bernanke with a box of bandaids and asprin to soothe the market ... and if that doesn't work a dirty trick ... they ignored Paulson so in his arrogance changed the rules and made all shorts buy back their stock ? You have 7 days ....


Gladly they use this ammo up needlessly and when the tidal wave hits ...


US govt cannot spend more than it is.


US Fed cant lower rates not with CPI at 25 year highs and it alread at 2% vs 5% CPI likely 6-7% CPI ...


All bullets wasted and spent.


Didn't think they would pull the SEC one making shorts illegal but that was a one off ....


Hmmm ....


All dead bodies propped up and not allowed no matter how dire their balance sheet is to wither and die.


Maybe they can close the US markets if people dont buy ?


My good friend Robert in Zimabawae when food prices went nuts he set a govt mandated price for food. Result no food in the stores at the govt mandated price.


Do we go to a black marekt for US shares ? Malaysia during the Asian financial crisis basically said get stuffed to the IMF and made trading and ownership of shares by foreign devils very hard.


Is this the next trick ?


This is the cookie jar Paulson opened.


be careful is all I can say.


Even things that look great and cheap ... boy one I thought was cheap a week or so ago and represented value at a certain level ... a profit downgrade later and its half price. Gladly I resisited the urge at the time.


Times like this I spread it very very thin and all around with smaller rather than larger holdings and instead of holding 30 stocks I might hold 90 or so .....


Still await something to tell me when its safe and the baboon schreeching at the marekt and then stealing all the bannanas did little for me. The cheek !! No short selling because you ignored my calls to buy Fannie Mae and Freddie.


I have another Bannana Mr Paulson ... open your mouth ... oh no ... that wasn't your mouth .... not again !!!


Wonder what the move will be tonight. Its like christmas every morning nowadays looking at what Ny did.


stay cool ... I suspect this move is rejected with a vengance over time and maybe even tonight ... but with banks rallying 22% in a single day off the back of a change in the LAW to protect US interests and US interests alone anything can happen.


Maybe they fix the price of all stocks !!! I love fixed prices :}


I used top be able to buy a paddle pop at 10 cents ... can you fix the price there and make the price for Bannana's extra cheap so i can keep feeding you ?


Rambling ... sorry ...


be careful ... be greedy and .... take 10% of the price you were thinking about buying it at.







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In reply to: kahuna1 on Thursday 17/07/08 04:48pm

be careful ... be greedy and .... take 10% of the price you were thinking about buying it at.



that's what i'm doing at moment k, if i can make 10% by go long for few trades then i'm doing well in this mother of all bear market.


for all the doom gloom you posted, you acturely missed out one thing, that is i'm scared most.


the usual cycle is------ slow economy brings down housing price.


but what we face now is housing price drag down economy,

once economy finally collapse, then it will drag down housing price agian, it's like never ending bad cycle.


reason i'm little bullish right now, is that Benny and Paulson addoped commie style to tackle the problem, i knew it too well, how poweful it can be affecting things for short term.


also i'm in two minds of "Benny might buy enough time to avoid the depression"----exchange for few years slow or zero growth. what if he can pull this one off??

just not sure.


thanks k

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In reply to: early birds on Thursday 17/07/08 05:58pm


also i'm in two minds of "Benny might buy enough time to avoid the depression"----exchange for few years slow or zero growth. what if he can pull this one off??

Thinking the same way myself.

After the latest CPI it seems it might now be a case of releasing a little bit of pain at a time.Not enough to scare the markets just enough to get things to where they should be and disguise it in whatever way they can and keep things moving.Eg the temp shorts ruling.

What next though..... K1 made a few suggections tongue in cheek eh!!!

Certainly entertainment thats for sure. Just a pity so many have to suffer though.

Where to next for the goal posts


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In reply to: veeone on Thursday 17/07/08 06:35pm

I agree with you both, Veeone and EB


Basically they are playing for time. Dont release any bad news especially when the market is on its knee's and hope over time the damage done to these financials actually stops and the commercial side can be hidden under the carpet long enuf to get some of the terrible asset values back near to the loan size. Sadly I dont believe this works and whilst your racking up spending of 115% of GDP ... over spending its more of the same which got them here in the first place.


What drove me mad in recent months was the way they did this with economic numbers. I could see and any blind person could see the price of oil late 2007 went from USD$85- for the month of DEC ave to up here and it never showed in the PPI or CPI and the GDP deflator was and is a joke.


Perversely this week they released PPI and CPI and they are all out of the seasonal adjustments and have yet to pay any back but just allowing 1 month of the 3 very heavy months rises was enuf to take the headline rates for PPI and CPI much higher.


As the year goes on ... last year the next three months which will be replaced with the upcoming 3 months PPI and CPI in 2007 ... there was no inflation in July/Aug or Sept ... 0.3% in total including food and energy last year and the thing is these massive seasonal adjustments have to be reversed so at best the CPI goes up another 1% even with oil at US$130- ... at worst its closer to 2% . PPI same sort of thing but more than double since oil is weighted at 17% on the PPI vs 7% on the CPI so the rise will be somewhere around the 2.5% at best PPI inflation and at worst 5% ... wide band I know but at best its looking at CPI 6% ... worst 7% PPI at 11.7% best and worst at 14% or more.


None of them good.


the totally annoying thing is despite these adjustments ... on the ground the inflation rate and prices being payed has been up there and is up there at 6% as opposed to the reported 4% up till last week.


Whole sets of Numbers were adjusted one way for one thing and the same product the other side was adjusted the other. Oil on one side of the trade accounts ... imports at US$106- and then even adjusted seasonally so its below US$100- and the other side the export side ... US exports a little bit but last month apparently they exported a lot and the other side was $130- ... same product 30% variation making the whole lot of the numbers a nonsense to say the least.


It will be interesting either Way these numbers since the price of oil now has been sitting in the US$130- plus region and these sorts of tricks are not possible in upcoming months because the trade one for instance was due to a time lag thing and they used an extreme version of it since most Us oil imports come from countries in the region not OPEC which it takes 6 weeks to get the fuel so the FOB free on board price when they load it in Saudi Arabia is the price they can use for the import price ... not really since 80% of the oil imported to the USA comes from Mexico and Venezuela and Canada so using the FOB price lagging 6 weeks to the spot was the trick they used to make the trade account snot look like the shockers they were.


So ... out of tricks if we sit here ... the FOB price even trying to delay it 6 weeks will not work because ... after the next set it catches up.


I do wonder what is the real read on these accounts but I suspect the trade number thats been reported constantly around US$60- billion via this trick if we sit here US$130- fop oil its 70 billion or more .... bad ... to worse I suppose.


Much the same sort of stuff for a whole swag of numbers in coming months. Retail sales the worst one ... done by the census bureau and despite the price of oil going up to the consumer 50% gasoline station sales via volume very much the same as they were 6 months ago ... according to them the sales numbers have only moved 10% upwards. Let me see you sell as many gallons for 50% more ... and the sales total only goes up 10% !!!


But as you both say ... they are delaying the pain and as little as they can get away with and hope things get better.


The trick with taking the shorts out of the equation not one I wish to dwell on ... but you change the rules like that ... its just a dirty trick. Playing a game of sport and you change the rules to favor your team because they are loosing.


In the end I suspect the PPI and CPI and Trade Numbers get far worse than the current reported levels just reflecting what is going on.


Where this sends the market ? No idea. With Freddie Mac and Fannie Mae the solution is not the solution ... it now appears Paulson wants to keep them exactly the same and ignore the fact its likely the total reserves are gone and its in the red by a long way. keeping it afloat via the US fed .... and just going on but this time instead of charging 0.1% for insurance the cost will be the correct 0.7% or more and this time they will look closely at the assets behind the paper they buy off the banks. will take I suspect at least 10 year if not 20 till they are in the black. The holes in their balance sheet are that large. Interesting one US bank actually was honest last night and wrote everything down with the assumption US house prices fall a further 17% ... I suspect this is about correct. Other banks range from the ones not even admitting they have fallen 17% to date ... about 24% away on valuations to those merely playing catchup with the current numbers each and every quarter as prices go a little lower. Double thing sin 6 years then double them again and then add another 8% .... about 225% from 13 years ago ... a 30-35% fall is about correct .


On the economic side nothing bright on the horizon .... the numbers if they were reporting the truth right now are bad ... CPI 6% or more and PPI 14% GDP I estimate minus 2% and trade numbers US$70- billion or more worse ... about 20% worse than last year. Fiscal side given this .... not good and no real glimmer out there.


So next 3 months the paper cuts keep coming via this and maybe maybe oil does fall out of bed but honestly cant see it being say US$100- for too long and even US$120 -seems cheap to me.


Outside the USA ... there is really strong evidence of very well formed inflation spirals out there and some of the emerging markets Namely China India and Vietnam which is shocking have serious problems. least of all is the Chinese since their currency they just keep revaluing it 1% a month so its taken the sting out of imported inflation ..... they now export it to places with weak currencies ... USA will eventually get around to reporting this but the raw trade numbers into the US show a Chinese imported inflation running at about 11% for 2008. They like waving the year on year number because prior to Nov 2007 the numbers were ok but since then ... yuk.


Has our market found a bottom ?


Possibly ... short term but the thing is with the US pulling a stunt like it did this week and then keeping Fannie Mae and Freddie Mac listed let alone the Mono-line insurers which are totally broke ... it perverts the market. Like keeping HIH afloat when one knew it was minus 2 billion ... these things start at minus 10 billion for the mono-lines and the Freddie and Fannie look to be minus 50 each and if they were to use the minus 17% the other bank used which I think is a fair call ... they are 100 billion minus if not more.


Pleasant outlook for them.


Life goes on ... markets go on ...


we are here at 4,850 ish on the ASX 200 and where the low is .... or where it stops is a bit beyond me ....


US markets this week with 10 items of bad news and 3 good .... its UP for many due to the tinkering via Mr Paulson.


There is no easy way out for the US and coming months I suspect shows how good a manager Bush and Paulson and Greenspan and Berananke actually were. Some very unpleasant decisions need to be made and changed to the whole structure of the markets and taxation and credit systems. with write downs at 600 billion roughly right now in the USA and likely 600 more to come its $4,000 per every man woman and child that went into someone Else's pocket. Tax side ... US federal govt in tatters and the baby boomer's post 2010 when they retire dont have enough to pay even the old age pension here to them by 2015 and just to pay that will require the US govt to raise 25% more taxes than it does.


At some stage we decouple to some extent from the USA but since we raise capital on the global markets and equities are traded nowadays in a truly global fashion I still remain very pessimistic on the US side overall.


US multinationals and their incomes form overseas yes a bright light on the US market but since 70% of the equity side operates inside the USA ... its a far larger negative overall.


Would like to see this last 10% ... the last 10-15% I have been waiting for to sell off but its like waiting for paint to dry. was hoping 4,700 might see the bottom but more of the opinion its going to be a little lower ... maybe not the 4,100 level which was an I wish sort of level to get long again ... I would settle for 4,300 right now.


Unlikely any time soon and will require the drip drip drip paper cut sort of thing we have seen in the past.


Amazing one banks says ok ...w e come clean ... we assume prices fall another 17% and write it all down with this in mind. Another bank owning exactly the same paper chooses to not do the same and values its very same bit of paper at 50% or more difference to the other bank. Its all OK and US SEC ... the ASIC in the USA has formally tunred a blind eye to these practices ....


Happy happy happy


Nice weekend to all.

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In reply to: kahuna1 on Friday 18/07/08 12:41pm

An interesting article:


Concern grows over a fiscal crisis for U.S.




(07-17) 04:00 PDT Washington - -- As the Bush administration proposes backstopping mortgage giants Fannie Mae and Freddie Mac with a $300 billion line of credit and Congress contemplates another economic stimulus, the question is who will bail out the government?


"People seem to think the government has money," said former U.S. Comptroller General David Walker. "The government doesn't have any money."


A rare consensus has developed across the political spectrum that the government's own fiscal affairs are precarious, with an astonishing $53 trillion in long-term liabilities, according to the Government Accountability Office.


To put that number in human terms, the debt has reached $455,000 per U.S. household. As that debt grows, the United States increasingly relies on foreigners, including China and Middle East oil producers, for financing.


"The factors that contributed to our mortgage-based subprime crisis exist with regard to our federal government's finances," said Walker, now head of the Peter G. Peterson Foundation, a group established to raise alarms about the nation's budget. "The difference is that the magnitude of the federal government's financial situation is at least 25 times greater."


Baby Boomers


This year's presidential election coincides with the first retirements of the 78 million people born between 1946 and 1964. The first of this Baby Boom generation may now collect Social Security. In three years, they will join Medicare, the giant health care program whose finances are commonly described as out of control. Medicare accounts for the bulk of the nation's long-term liabilities.


The presidential candidates, Republican John McCain and Democrat Barack Obama, have not addressed what the aging of the Baby Boom generation means for the federal government. Their brief forays - Obama's suggestions to raise the payroll tax on high-income earners to buttress Social Security and McCain's description of Social Security's financing as a disgrace - have been met with furious attacks.


Both promise to spend hundreds of billions of dollars on new tax cuts and spending programs. Their health care proposals concentrate more on expanding access than controlling the soaring costs that are driving the federal budget problems and squeezing workers and businesses.


Health care costs


"Health care costs are just amazing," said John Shoven, director of Stanford University's Institute for Economic Policy Research. Total health care costs now consume 16 percent of the economy and are headed quickly toward 30 percent, Shoven said. "Social Security is a big problem, but it's dwarfed by health care. Even the housing problem is dwarfed by health care."


Just the built-in rise in spending on programs for the elderly will cost about 25 percent of workers' payrolls over the next generation, said Richard Jackson, director of the Global Aging Initiative at the Center for Strategic and International Studies.


Robert Greenstein, director of the liberal Center on Budget and Policy Priorities, agreed that "the nation faces large, persistent, long-term deficits that ultimately risk damage to the economy. We agree that policymakers have to make tough choices soon."


There is consensus, too, on what needs to be done: Cut spending and raise taxes. A bigger problem is how to contain health care costs, but some form of rationing is necessary, experts said.


Only disagreement


The only real disagreement is whether the government's fiscal condition will lead to a financial meltdown, or whether the U.S. economy is strong enough to right itself without a sudden loss of confidence and a flight of foreign capital.


"People on Wall Street think I'm Dr. Doom & Gloom," said Kent Smetters, an economist at the Wharton School of Business at the University of Pennsylvania and a former Bush Treasury official. "I believe we could have a financial crisis like we've seen in South America or Asia. It could easily happen, and under current policy will happen in the United States. People say, 'Gee, give me a date.' Obviously, that's impossible, but the longer we wait, the higher the probability. Could it happen in the next decade? Absolutely."


Alice Rivlin, budget chief in the Clinton administration, discounts the possibility.


"We're a much stronger economy than Argentina," Rivlin said. The government "can handle borrowing in the range that would be necessary in a recession," she said. "What we can't handle is the cumulative long-run obligation."


Financial markets are often fixated on the short-run, and the government's finances are far from transparent. Unlike corporations, the government is not required to state its long-term obligations. Crises of confidence, like today's banking problems, strike suddenly when a tipping point is reached and investors decide to flee.


The government's fiscal problems are "like termites in the house," said Jackson. "You don't notice it until foundations are eroded."


"I had such a frustrating meeting the other day on the Hill, where one staffer said, 'We don't have a problem until Wall Street tells us we have a problem,' " said Maya MacGuineas, head of fiscal policy at the nonpartisan New America Foundation. "By the time the financial markets tell us we've gone too far, it will be too late to fix this in any rational way. We are the toad in boiling water, where it's getting hotter and hotter and nobody's really noticing."


Will they still buy?


The key is whether foreigners will continue to buy U.S. debt. They now hold 45 percent of U.S. Treasury securities, and in all about $11.5 trillion of U.S. public and private debt, say UC Berkeley economists Ashok Bardhan and Dwight Jaffee.


Chinese entities, including sovereign wealth funds that invest government savings overseas, own about 10 percent of U.S. Treasury securities. Even a minor change in China's investment policy could have a major effect on the dollar's value and cause "a sizable increase in interest rates," the economists said.


Still, because of a shortage of creditworthy debt instruments worldwide, and the large role of U.S. institutions in global credit markets, foreigners have little choice but to invest in the United States, they said, predicting "slim chances of abrupt change."

Action needed soon


Whoever's right, all agree that the sooner the problem is tackled, the better. "Like almost any financial problem, if you don't work on it, what happens is it compounds with interest," Shoven said. "There are lots of ways to fix it, and what we pick is none of the above."

The staggering U.S. debt


The federal government's finances are in worse shape than its annual budgets show, because the government is not required to state its long-term obligations, which work out be about $455,000 for every household in the nation.


Breaking down the numbers


Current liability:


Social Security: $6.7 trillion


Medicare: $34.1 trillion


Total long-term government liability: $53 trillion


Source: Government Accountability Office, Long-term Fiscal Outlook, Jan. 2008

Where it goes


U.S. debt held by foreigners as of mid-2007:


-- Foreign holdings of U.S. equities: $5 trillion


-- Foreign holdings of U.S. corporate bonds: $3 trillion


-- Foreign holdings of U.S. Treasury securities: $2 trillion


-- Foreign share of U.S. Treasury securities: 45 percent.


Source: UC Berkeley economists Ashok Bardhan and Dwight Jaffee, YaleGlobal online, April 2008



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