Monday, November 17, 2008

It’s Only a Matter of Zeros

In the mid-1990s I was conducting research on the operations of local stock exchanges in the Caribbean. Sitting in the office of an individual I was interviewing, he interrupted our conversation to place an order for U.S. government bonds.

The company for which he worked was an offshore pension fund of a major multinational energy firm with headquarters in the United States. The reason for the funds location in a Caribbean jurisdiction was the absence of a corporate income tax, which enabled the fund to earn a pre-tax return on its investments until money was repatriated as required to pay the pensions of the firm’s retirees.

Returning to his phone call, he placed an order for $150 million of U.S. government bonds. My jaw dropped. I was not then used to hearing instructions to purchase financial assets in such large amounts. Looking at my discomfiture, he casually remarked “It’s only a matter of zeros.”

Fast forward to late 2008. Millions are so small as to no longer constitute a rounding error on government expenditures, tax cuts, or the creation of credit by the Federal Reserve Board. The same applies to most of Western Europe. The U.S. federal budget deficit in fiscal 2009-10 could well amount to $1 trillion ($1,000,000,000,000). The Congressionally-enacted TARP program authorized $700 billion ($700,000,000,000) for the purpose of preventing an implosion in U.S. financial markets. Additional appropriation of funds if needed could propel that above $1 trillion ($1,000,000,000,000). The Fed’s increase in credit since the financial crisis unfolded is estimated at $2 trillion ($2,000,000,000,000). The federal government’s public debt has surpassed $10 trillion ($10,000,000,000,000) and will grow rapidly during the next few years.

Will these subsidies, loans, credits, and deficits be repaid? Perhaps, but not in the short run. Perhaps only indirectly through inflation. As I noted in a previous post (March 6, 2008), the time may soon come for the fresh printing and circulation of $500 and $1000 bank notes, as the existing $100, $50, and $20 notes come to buy less.

1 comment :

1 said...

"Will these subsidies, loans, credits, and deficits be repaid? Perhaps, but not in the short run. Perhaps only indirectly through inflation"...

Hmmm, so we as a nation are looking to the Zimbabwe model as our potential future, eh?

Well I'm sure that's now a stronger possibility than ever...

Just imagine how much easier it would be to solve this problem if we got the ENTITLEMENTS monkey off of our collective backs...