Friday, July 18, 2008

Credit Score

The federal budget deficit reached $268.7 billion by the end of June 2008. That is the third highest deficit in history. The federal government took in $1.93 trillion and spent $2.2 trillion since the beginning of the fiscal year (October 2007).

Where is the money going? Health and Human Services, including Medicare and Medicaid, spent $520.4 billion. Social security burned up another $491.7 billion. The military is right behind, using $439.5 billion. Do not forget interest on the public debt, which soaked up another $377.3 billion. An advocacy group provide an excellent color graph of historic spending.

Ever see those advertisements for services that will provide a personal credit score. Your score determines whether you get a good credit card or a car loan. Credit rating agencies check on your track record for paying bills and whether you are over extended, that is spending more than you earn. The more debt relative to income, the lower the credit score with be.

One wonders what credit score the United States of America might have if there were such a thing. Well actually, my argument is that there is something of a credit score - the value of the U.S. dollar.

Now Ben Bernanke, a very smart guy and the Chairman of the Federal Reserve, says that the value of the dollar has only a tangential link the federal budget deficit. He made this point in response to questions by members of the Senate Banking Committee in a hearing on July 15, 2008. There was a hint of derision in his voice as if he considered the question ridiculous.

Hopefully, the Committee members picked up on a couple of Bernanke’s other comments during the committee hearing. He also noted that the decline in the value of the U.S. dollar is not entirely due to the cost of oil. Indeed, Bernanke characterized the U.S. has having a “credit economy.”

Maybe Bernanke just did not want to offend the senators sitting in front of him. He was after all their guest, giving his semiannual monetary policy report. He was being asked to explain why he wants the Federal Reserve to have more regulatory power. The Senators were also a bit irritated with the prospect of yet another bailout - purchase of Fannie Mae and Freddie Mac debt - especially since it appeared to require a blank check from Congress. Perhaps Bernanke was ignoring Economics 101 to save face.

The fact of the matter is that the value of the dollar is linked to the confidence that investors have that the U.S. federal government can repay the loans it makes. That confidence - that credit score - is sagging. Of course, the U.S. dollar and the budget deficit do not reside together in a vacuum. The U.S. trade deficit and low interest rates are also at play in the economic “time warp continuum.”

This post ends here, with no conclusion. That is primarily because there seems to be no conclusion - no closure, no solution to the monetary and fiscal difficulties in our economy. That means investors should not be looking for any elevation in stock valuations any time soon - just more of the same indecision and volatility that has become all too familiar in the U.S. equity markets.

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