Out of the Frying Pan Into the Fire

Has anyone wondered how long the world will finance the excesses of the United States?  As the baby boomers start to draw on their social security and to rely on medicare for medical care, increasing at rates faster than inflation, the budget deficits will start to soar even worse than they are now.   Before those benefits start in any significant amount, the budget deficit has already increased to 454.8 billion for the fiscal year ending September 30, 2008, beating the prior record of 413 billion in 2004.  It is anticipated to exceed 700 billion this next fiscal year.Yahoo! Finance In June 2008, the Congressional Budget Director testified that "the U.S. economy faces the long-term threat of 'collapse' unless major reforms on health care spending are instituted in the coming years"  Unfunded liabilities for Medicare and social security may be approaching as much as 100 trillion dollars, depending on whose forecast you use.  Most of the U.S. debt is short term and has to be rolled over constantly, with 71% of the debt due within 5 years.  Almost 1/2 of the debt is held by foreigners with  Japan and China together having about 1.1 trillion.  The current debt per person is over $30,000.  Soon with a modest rise in interest rates, it will take 500 billion  just to service the debt.  The government currently estimates that adding the unfunded liabilities will increase the debt per household to over $500,000.United States public debt - Wikipedia, the free encyclopedia  Recent events will just make it worse as expenses soar and revenues decline.  During the Clinton years, taxes on capital gains during the bull market of the 1990s helped to balance the budget near the end of his term but who has capital gains now.  Unemployment is rising and incomes have been stagnant for years adjusted for inflation. Household income in the United States - Wikipedia, the free encyclopedia  

I would seriously doubt there will ever be the political will to tackle this problem which is already out of control.

One point about the new radical bailout idea for the banks is that it gives the public an incentive to invest in  future bank preferred stock issues.  When the government put  Fannie and Freddie  into conservatorship, the preferred stock issues were just about wiped out.  For many months prior to that event, U.S. banks had been successfully raising new capital by issuing preferred stock.  The destruction of value in the preferred stocks of Fannie and Freddie made that option impossible.   I am not aware of a single public issue of preferred stock by a bank since the seizure of Fannie and Freddie.  Investors do not care to see an investment go to zero soon after buying a $25 par value preferred stock issue which happened with one of the Fannie preferred issues from earlier in the year.  Also, given the preference rights,  a preferred shareholder is unlikely to receive anything in the event of a FDIC seizure.   So a new shareholder in a preferred stock issue wants to have a lot of comfort about the bank surviving and not just for a few months.   The new plan does not destroy or even diminish existing common and preferred stock holders in the banks, and requires only the payment of a 5% annual dividend for five years.   Thus, as I understand it now, it adds capital in a non-punitive way and even shores up the value of existing preferred shareholders by adding to the bank's capital on favorable terms.  That is why you saw a huge rally today in bank preferred stock issues.  This plan will give the banks an opportunity to raise additional capital down the road by issuing preferred and common stock, and hopefully the preferred stock will not have to be on onerous terms.  Prior to this action, it was common to see existing  bank preferred stocks reduced in price to 1/2 or lower of par value, juicing the yields in many cases to 15 to 25% which would be prohibitively expensive for a new issue.   You want private investors providing the needed capital in the long run rather than the U.S. government.