In case you were wondering
all these past few months, it
is now official:

The U.S. Economy is indeed
a TRAIN WRECK!

Morgan Stanley's chief econo-
mist, Richard Berner declared
that, "America's long-awaited
fiscal train wreck is now under
way."

Mr. Berner says that the out-of-
control federal budget deficits
will surely drag the economy
under.  "Depending on policy
actions taken now and over the
next few years, federal deficits
will likely average as much as
6 percent of the gross domestic
product through 2019, contri-
buting to a jump in debt held by
the public to as high as 82
percent of GDP by then -
doubling over the next decade."

Writing for Morgan Stanley's
online Global Economic Forum,
Berner has more conclusions.
"Worse, barring aggressive
policy actions, deficits and debt
will rise even more sharply
thereafter as entitlement
spending accelerates relative
to GDP.  Keeping entitlement
promises would require unsus-
tainable borrowing, taxes or
both, severely testing the cre-
dibility of our policies and
hurting our long-term ability to
finance investment and sus-
tain growth."  Berner adds,
And soaring debt will force up
real interest rates, reducing
capital and productivity and
boosting debt service."  He
concludes, "not only will those
factors steadily lower our
standard of living, but they
will imperil economic and
financial stability."

This comes on top of our
Vice President, Joe Biden,
declaring on Sunday that
the Obama Administration
got it wrong.  They under-
estimated just how bad the
economy is.  That the stimu-
lus bill has not produced
any beneficial results.  In-
deed, Congressional hear-
ings today attested to how
the $57 Billion already spent
has done little else but help
state governments meet their
payroll and Medicare tabs.

Many of the so-called, “shovel-
ready” projects have turned out
to be either boondoggles or
less than originally billed.  For
example, the funds to begin
construction of NEW roads is
being spent instead on filling
in potholes on existing roads.
Many states have used their
stimulus money to pay salaries
for teachers and state troopers.
During the hearings, the price
tag for each new job allegedly
created costs the taxpayers
nearly $400,000 each!  Seems
it might have been better to
just hand out $50,000 each to
eight people if you wanted to
stimulate and spread the
wealth around.

The stock market has been
anemic.  Since bouncing back
from it’s lows below 7,000,
the DOW Jones has made
zero progress.  The last week
it’s lost more ground and is
once again threatening to
dip below 8,000.  The bond
markets have become a joke
with the U.S. Treasury holding
more auctions than eBay.
Even commodities like gold
and oil look shaky at the
moment.  So much oil is now
going unused that it’s being
parked in tankers all over the
world, waiting for better days.

Biden’s comments come only
a week after Obama declared
that the stimulus was a suc-
cess, accomplishing it’s ob-
jectives.  After Biden’s Sunday
talk-show remarks, Obama
has modified his tone while
abroad, acknowledging that
unemployment probably will
continue to increase and rise
above 10% by year’s end.
This, after promising that the
$787 Billion dollar stimulus
package would keep unem-
ployment below 8%.  Some
states have it even worse.
A recent study by the Uni-
versity of Michigan says that
the state’s current level of
14.2% unemployment will
rise well above 15% by the
end of the year.

Talk in Washington of the
need of another massive
stimulus package, or of
several smaller ones, is in-
creasing, despite polls
showing that American tax-
payers are unhappy with all
of the runaway spending
and deficits piling up.  Even
a TARP-2 is being discussed,
despite the fact that TARP-1’s
$700 Billion dollars did little
more than allow a handful of
corporations to be bailed out.
Many of which used TARP
money to buy other assets
like banks and tankers full
of oil at 3% interest.

The biggest problem looming
on the horizon, of course, is
the Federal Reserve and the
value of the U.S. dollar.  As
deficits increase, the need to
cover the debt with more
Treasury bonds seems to have
reached a saturation point.
For nearly two months now,
the Fed has had to step in and
buy bonds themselves when
nobody else would.  This using
money they just simply print.

The goal of every typical poli-
tician is to get re-elected.  They
achieve this by appeasing the
public and industries with good
lobbyists with spending bills
to benefit the constituents.  As
this method tends to add to
the National Debt, the old-
fashioned way to deal with the
Debt, other than cut spending
or raise taxes, is to make the
Debt worth less through infla-
tion.  As the dollar gets weaker
and more plentiful, the Debt
becomes easier to manage.

But this scheme only works
if the economy is growing
enough to accommodate
a reasonable rate of inflation.
As Lyndon Johnson, Richard
Nixon, Gerald Ford and James
Earl Carter came to realize,
once the rate of inflation ex-
ceeds 5%, it effects the interest
rates in the private sector
enough to slow down an eco-
nomy.  Houses become too
expensive to finance, as do
cars and other products.  The
average consumer does less
consuming, only buying what
he or she needs, and then so
only with cash.

This then begins a downward
spiral of less production, less
employment, and then even
less consuming, etc, etc, etc.
LBJ’s Great Society programs
and the Vietnam War led to
the ‘stagflation’ of the 1970s.
Even with the Reagan Revolu-
tion of lower taxes and less
regulations, coupled with
Paul Volker’s tightening of
Federal Reserve policy, while
ending stagflation, caused
a deep recession that lasted
nearly three years.  Economists
are split as to whether our
current situation is worse than
or better than the 1970s.

Already Obama has expanded
federal deficits to levels that
rival actual entire budgets only
a decade ago.  If his additional
programs, like health care and
Cap & Trade, are made law,
the impact could be enough to
completely cripple economic
growth for many years to come.
By 2012, the entire nation may
become like Michigan!  Or
even worse, bankrupt like
California.  Would you accept
an I.O.U. from Uncle Sugar?