Procerity

The U.S. administration’s plan to bailout bankers is expected to result in an increase in U.S. government debt in excess of $1 trillion dollars. The trillion dollars will be used to buy financial assets derived from mortgages and to rescue money market mutual funds. We are witnessing an enormous wealth transfer to a select group of share- and debt-holders at the expense of the taxpayer. Fear of a seizure in the financial markets triumphs “moral hazard”.

The stock market responded positively on Friday, but over the weekend some investors will inevitably have turned their minds to what the bailout means for the country. The U.S. is already facing twin budget and current-account deficits and consumers are also overextended. How will the rescue plan be funded? One possibility is for the government simply to print the money it has pledged to make available for the rescue plan. There appears to be little appetite for raising taxes to pay for the bailout.

With interest rates dipping below the rate of inflation and the government printing money, we may expect to see pressure on the U.S. dollar. The value of the U.S. dollar is essentially a proxy for the stock of the entire nation and the country has just increased its federal government’s liabilities by 10% without any commensurate increase on the other side of the balance sheet.

Procerity’s prognosis: Investors will lose purchasing power investing in U.S. dollar denominated fixed-income assets, especially short-term money-market instruments.