Bail outs

The US government, being the leader of the market capitalism ideology has done the unthinkable in the last few months - bailing out big private companies. The ideology that has been used to demonised socialism is now seen as a fraud by some. When it comes to big capital, losses are absorbed by the public while profits remained private.

Despite the US government agreeing to provide a $85bn loan facility to AIG in return of 80% of its equity, a number of key Republican politicians have voiced out their disapproval over such action. In their opinion, the Congress should at least be consulted and taxpayers monies should not be used to fund failing corporate giants that put greed before responsibility. They are strongly against using tax payers dollars to bail out private companies and are furious that the US government is sending out inconsistent messages by refusing to save Lehman Brothers. They also question the discretion of which companies get rescued and which ones not.

However, those who worked out the AIG rescue package have defended their position, stating that "AIG is too big to fail" and that failure of AIG will have too serious an impact on America's financial system. Furthermore, they argued that AIG has quality assets as most of their subsidiaries are profitable and desirable. If AIG was allowed to file for Chapter 11, these profitable units within AIG would have been sold at a far lower value in the fire sale. The loan would allow AIG time to sell of some of its business units at more reasonable prices. They argued that the tax payers will benefit from the profits generated by AIG eventually.

Many signs are pointing to the failing of American capitalism and profit system. Very soon the credit-worthiness of US Treasury Bonds may come into question.

From the Wall Street Journal: Some investors are even betting they may profit from weighing the unthinkable question: "Could the US government default?"

Too much greed is bad.

US Current Account Deficit

There has been a lot of focus on US subprime sector lately. I think the more worrying trend is the US current account deficit which is growing substantially over the years. the Americans are having great lives at the expense of the whole world, and the good times may be coming to an end soon.

Excerpts from The McKinsey Quarterly...

At $857 billion and still growing

• The US current-account deficit could continue to grow for at least five years.
• A major depreciation of the dollar could eliminate the deficit during that period, but in fact, such an adjustment would probably be gradual.
• At any pace, the dollar’s depreciation would trigger significant changes in global trade and savings.
• Governments, business leaders, and investors should prepare for the potential effects on operations and investment priorities.

Two views of the future

• Continued growth of the US current-account deficit - the deficit will balloon to $1.6 trillion... The US is likely, over the next 5 years, to retain some unique advantages that help service a large foreign debt. Most obviously, it is denominated in the country's own currency, the dollar, eliminating the risk of ballooning payments resulting from currency swings... United States has historically earned higher returns on its foreign assets than it has paid to overseas investors. One consequence is that the US net foreign debt today is significantly smaller than the sum of past current-account deficits. If this pattern continues, interest payments on the large external debt resulting from an even larger current-account deficit would be relatively low, at less than 1% of GDP.
  
• Elimination of US current-account deficit - ... 30% depreciation of the dollar from its January 2007 levels would fully balance the US current account by 2012. A smaller decline - of 20 to 25 percent from January 2007 levels - would reduce the deficit to roughly 2 to 3 percent of GDP, respectively, which many economists feel is sustainable.
  

The authors predict that the adjustment is more likely to be gradual than abrupt, i.e. something between the two extreme scenario.

Read more here and start moving your $$$ away from dollars or currencies heavily linked to dollars - Malaysian ringgit?