Just Bail Out Everybody
by Ashok Talukdar CFA | December 30, 2008
PrintSo, two nuclear options now appear to have been exercised in the fight against deflation. As if Bernanke-san’s move to quantitative easing weren’t enough, the Obama-Biden administration looks hell-bent on complementing the Federal Reserve’s monetary WMD with a fiscal one of its very own. Whether the trillions of dollars in this mother of all economic pincer movements is sufficient to offset the deflationary effect of the trillions of dollars already wiped from home and equity prices is now almost of no relevance. Nor is the possibility for even greater deflation by saddling our nations with even more liabilities, nor the futility of trying to repay debt with more debt, nor the fact that Japan’s own experience with QE and endless, mindless, unproductive Keynesian construction has itself proven highly questionable, if not downright counterproductive.
No, these concerns are irrelevant because the fact is that our policymakers’ shock and awe tactic appears to have started working where it matters. Anecdotally (and soon perhaps quantitatively once the 2009 fund manager surveys start appearing), the chatter at interviews and weddings and dinner parties is now about the unbounded inflation that is imminent, rather than any further scope for the deflation that is with us and which most people came to recognise just a little too late. Just because the bond market is sceptical enough to still price deflation for the next couple of years for everywhere but the Eurozone (and, in fact, seemingly in perpetuity for poor old Japan) matters not one jot to a Treasury & Federal Reserve system that has grown contemptuous of its own creditors.
In truth, this is no more than a reflection of the contempt shown to us all by our politicians when they lied six years ago about going to war, or the contempt they’ve shown our armed forces ever since, or the contempt with which Anglosaxon government finances were treated since the start of this century. The steady erosion and cumulative undermining effect these behaviours have on our national institutions and on public trust in government is simply not a concern for our leaders. What they do recognise is popular sentiment and the value of making an instant impact on our economic expectations. The new dinner party chat about inflation is therefore a great breakthrough for the Feds and the effects of an actual inflation further down the road is something they can deal with later by manipulating our expectations contrarily nearer the time. The Fed’s short-termism is a knee-jerk to the thoroughly justified short-termism of millions of concerned investors and, presumably, the actual economics of whether the current shock and awe will prevent deflation or make it worse is of little importance to anyone yet.
But to pull my own weight in this heroic uber-Keynesian effort, I want to ensure our governments are spending enough of our tax monies propping up sclerotic, outdated behemoths in industries that are long overdue a restructuring but that can nonetheless be classified as systemically critical. To that end, I’ve taken a quick look at the cash-flow situation of some of our initial bailout recipients (high quality financial analysis is by now superfluous) with a view to identifying who else out there could be trying harder to deplete their cashflow and therefore their ability to repay their debts.
Take Freddie Mac. Of all the cash that was generated from their operations, investments and financing activities last year, the sum was negative to a degree sufficient to long frighten away rational bond investors but not our fearless policymakers. General Motors and Citi didn’t quite manage that feat but did deplete their cash to a paltry positive level well ahead of crawling to Capitol Hill – not quite a textbook overstretch but a jolly good effort both. However, not everyone is participating quite so seriously and some companies need to buck their ideas up…
The cashflow lost from Caterpillar’s investment and financing activities almost erases that gained from its operations but they have yet to cry for a bailout. I can only suggest that they have a good, hard think about how systemically critical they are to the Obama-Biden plans to pave over America and take the next commercial flight to Washington.
The cashflow generated by Halliburton’s operations has long since been dwarfed by that lost on its investment and financing activities but can we really afford to lose this stalwart on the War on Terror? Dick Cheney needs to get back behind the wheel there and drive immediately to Washington for a bailout - leave no dollar behind. Likewise, the oil majors (positioned as they are in the ultimate critical industry, inherently hugely leveraged and producing something that has fallen in price by ¾) need to get with the program and whittle away their fat net positive cashflows. Bailing out big oil would be a huge step toward offsetting our well deserved deflation.
It’s the technology firms that are really letting the side down at this time. If the Obama-Biden plans for broadband access, clean energy and medical IT are to be satisfactorily stimulative, the likes of Microsoft and IBM have to just give away the enormous cashflows they generate from operations and waste a lot more on investment and financing activities, just like everybody else. They really will have to look convincingly insolvent and systemically critical if this shock and awe thing is going to work properly.
I don’t know if the Bernanke-Obama-Biden bailout binge will necessarily have to stretch fully to the $14 trillion (and counting) that has so far been lost from astronomical home and equity prices before the bond market and other sceptics capitulate. But I do know that (to paraphrase Senator Everett Dirksen) a trillion here, a trillion there – pretty soon it adds up to real money.
Copyright © 2008 Ashok Talukdar CFA
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Ashok Talukdar CFA | London, England | Email
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