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Beware Backlash When U.S. Finally Comes Up Short

By Robert Wiedemer   |   Monday, 26 Apr 2010 02:27 PM

Never underestimate the power of the federal government to borrow or print money.

Their ability to do so has greatly diminished the short-term problems created by the most recent financial crisis.

It is also why I would predict no significant financial crises for the economy in the next couple of years.

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If there are any major economy-threatening problems with commercial mortgage backed securities, state or local governments, or almost anything else, the federal government can easily bail them out and likely will.

I live in the Washington, D.C., area and the effects of that power to borrow and print are keenly evident.

While even the very wealthy counties in our area are having major financial problems due to revenue shortfalls and having to resort to layoffs, program cuts and other cost cutting measures, the federal government seems oblivious.

Even though their revenues have fallen even more dramatically than the counties and states in our area, they haven’t had to cut at all and have actually hired more than 20,000 people in our area in the last year alone.

It’s truly amazing. And we all know why.

The government doesn’t need to worry about revenues.

And it’s worth noting the size of its ability to ignore revenues and, instead, support and bail out our economy.

If GM loses $2 billion a month, that is potentially life-threatening to one of the largest private companies in our nation.

For the U.S. government, that’s a rounding error.

If one of the largest banks in the country lost $50 billion, it could mean the end of that bank.

For the government, that was last week’s Treasury auction.

Let’s talk about the next auction.

If the stock market is down, nothing like a huge purchase of bonds to push private money out of bonds and back into equities and kick off one of the biggest rallies in the history of the U.S. stock market — which is no small thing.

The government’s power is enormous.

What’s the magic?

We all know, but we all tend to ignore — If the government needs to increase its borrowing by 400 percent, from an already high $300 billion to $1.5 trillion, no problem.

If the government can’t sell all those bonds, no problem, it can simply increase the money supply 200 percent from $800 billion to $2.4 trillion and buy the bonds themselves.

It doesn’t seem like there is any limit to the size of the increases in the money supply or the federal debt.

It’s like a cookie jar — We know we shouldn’t steal from it, but if we do, who cares?

You’re not going to get fat overnight.

But, is there a limit to all this?

Well, of course there is, but what is it?

I talk more about that in my book "Aftershock," but let’s say it’s not our children’s problem.

When we’re talking 400 percent increases in our deficits and $15 trillion debts and 200 percent increases in our money supply, we are rapidly taking this problem from our children and making it ours.

You ask, why do I state the obvious?

Because it’s important in making your investment decisions.

Don’t simply overlook the governments’ enormous effect on the economy short term because it’s uncomfortable.

That means for all you bearish types, be careful, the federal government can do a lot in the short term to help the economy.

But, for all you bulls who think we are just turning around in a normal business cycle, think again.

The power of the federal government is at work now helping the economy like never before in our history. It’s not a normal business cycle.

As I have said before, it is a bubble pop that the government is trying its damndest to keep from popping further.

But, those actions to minimize the pop have consequences and those consequences can hit us much sooner and much harder than most bulls can possibly imagine.

About the Author: Robert Wiedemer
Robert Wiedemer is president of the Foresight Group, a macroeconomic forecasting firm that customizes its forecasts for specific businesses and investment funds. He is a regular contributor to Financial Intelligence Report, the flagship investment newsletter of Newsmax Media. Click Here to read more of his articles. Discover more about his latest book, Aftershock, by Clicking Here Now.

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