Big Three Automakers Ask For $40 Billion Loan (Bailout)

Detroit 3 ask up to $40 billion in loans (Aug 5 - Detroit Free Press)

Detroit's three automakers are urging Congress to make as much as $35 billion to $40 billion in low-cost loans available during the next two to three years to assure that the companies survive long enough to retool and build a new generation of fuel-efficient vehicles.

While I agree that our "big three" automakers are also going to need a bailout, and, in the interest of fairness, they deserve one more than Wall Street's careless mortgage masters, there's a problem here.

And I am not referring to my concerns that the last semblances of a "free market" and "capitalism" are disappearing before our very eyes (did they ever really exist?), but rather, my concern centers on the borrowing ability of the US Government.

It's true that LOTS of borrowing room exists for the US Government, because long-term Treasury Bond interest rates remain below the rate of inflation by 2%-9%, depending on which representation of inflation you happen to believe. But let's add this up:

1. The 2009 fiscal year deficit for the federal government is now pegged at ~$500 billion.
2. The Fannie/Freddie bailout is probably going to be an incremental $100 billion to $200 billion next year.
3. The hit to the FHLB (you heard it here first) for the junk loans they snapped up last August as part of a stealth bailout is probably going to be another $15 to $20 billion.
   
4. The FDIC is going to need anywhere from $10 billion to $100 billion, depending on who goes belly up next year.
5. Don't forget, the wars are mostly "off budget," so the $500 billion deficit is really more like $800 billion, giving us an extra $300 billion which which to contend.

Adding up the high end of these estimates give us a 2009 borrowing figure of more than a trillion dollars for the US Government.

On top of this, let's factor in state, municipal, corporate, and banking borrowing needs that will all be contending with US Government borrowing for a limited pool of funds.

Action: If you have the decision of taking either an adjustable or a fixed rate of interest on any borrowing, choose the fixed rate. All this borrowing has a very high probability of driving up interest rates.

Next, there's a very high chance that much, or all, of this vast need for additional money will be met with new money creation by the Fed. Expect inflation to continue, if not accelerate, if all the listed government fiscal needs are to be met with borrowing only and not through tax hikes (a near certainty during an election year when spending cuts are O.F.F. the table).

Note: I am *not* a fan of tax hikes. I am a fan of spending cuts and living within our means.