Government’s Free Money Pledge Greater than Average Income

by Michael Lombardi, CFP

Depending on which report you read and/or believe, the U.S. government has pledged just under $13.0 trillion to revive the economy and help the banking system. A big number.

In the midst of the first global recession since World War II, the U.S. is pulling out all the stops to get this economy going again. Some might say all the government stimulus will eventually kick in and jump start the economy. Others might say the government is throwing away taxpayer money. (Despite our difference of opinions, I’m sure that in the end we all hope the stimulus will work.)

According to the U.S. Census Bureau, the median income of a male working full time in the U.S. was $45,113 in 2007. If we take the $13.0 trillion U.S. bailout (for lack of a better word), that’s over $40,000 pledged for every citizen in the United States. Yes, a mind-boggling comparison.

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The U.S. government may be getting further into debt, issuing debt securities to pay for all these pledges, increasing the money supply and more – but, in the end, only taxpayer dollars can truly repay what the government spends. If the average working person makes over $40,000 a year (I believe the true figure is much lower) and the government has pledged $40,000 per every citizen in financial crisis bailout money, it will take years before tax revenue covers the debt burden the government has created.

What does this mean for investors?

To me, it means our U.S. currency will come under immense pressure. Companies that import into the U.S. will see their earnings impaired. Tourism outside the U.S. will decline, while tourism into the U.S. will increase. Alternatives to the U.S. dollar, like gold-related investments, will do very well in the years ahead.

Michael’s Personal Notes:

Usually I feel sorry for shareholders of companies that see their stock prices decline, while I hold bad management accountable. In the case of Berkshire Hathaway, Inc. (NYSE/BRK-A), I feel for both the shareholders of the company and for Warren Buffett himself. Why “feel” for Buffett? After all, he has enough money of his own. Berkshire had the worst year since 1965 (when Buffett took over the company) in 2008. Yesterday, Moody’s Investors Service cut Berkshire’s top-level credit rating. Buffett underestimated the severity of the current recession and made some bad bets. I’ve read most books ever written about Buffett and I sincerely believe his motivation is not money or corporate greed. If anyone has been hardest by the downgrade in its credit standing and the poor performance of Berkshire last year, it is Warren Buffett himself.

Where the Market Stands:

Stocks taking a breather from their bear market rally…that’s the best way to explain the current market conditions. The Dow Jones is presently down 10.7% for the year. The NASDAQ is the only major stock market trading positive for 2009. On the commodity side, both gold and crude oil are up for the year. It now takes 8.8 ounces of gold bullion to buy the face value of Dow Jones Industrial Average index, which is down from over 40 ounces only two years ago. Long-term, markets are going down, gold is going up.

What He Said:

“You’ve been reading my articles over the past few months and have seen how negative I’ve become on the U.S. economy. Particularly, I believe it’s the ramifications of the faltering housing sector that are being underestimated by economists. A recession doesn’t take much to make it happen. It’s disappointing that more hasn’t been written on the popular financial sites and in the newspapers about the real threat of a recession happening in 2007. I want my readers to be fully aware of my economic opinion: I wouldn’t be surprised to see the U.S. economy in a recession sometime in 2007. In fact, I expect it.” Michael Lombardi in PROFIT CONFIDENTIAL, November 13, 2006. Michael was one of the first to predict a U.S. recession, long before Wall Street analysts and economists even thought it a possibility.