By Keith Fitz-Gerald
Money Morning/The Money Map Report
Did U.S. taxpayers dodge a bailout bullet?
Maybe not completely.
To be sure, under the $700 billion credit-crisis bailout plan proposed by U.S. Treasury Secretary Henry M. “Hank” Paulson Jr., there were some decidedly scary codicils.
For one thing, there was a near complete lack of taxpayer protection. To see what I mean, just take a look at the part of the plan that reads: “Decisions by the [U.S. Treasury] Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.”
No administrative agency?
No kidding …
As Jason Linkins writes in The Huffington Post, Section 8 of the Paulson plan allows for a “consolidation of power and an abdication of oversight authority that's so flat-out astounding that it ought to set one's hair on fire.”
Section 8 (an ironically appropriate term for the plan, as I’m sure anyone familiar with military jargon – or the TV series M*A*S*H – would agree) would have established Paulson as the de facto financial dictator-at-large, included no oversight as to financial operations, and consolidated power in an unprecedented fashion.
Thankfully, some lawmakers balked. If they hadn’t, and the plan passed into law unaltered, I realized that we soon would be welcoming U.S. taxpayers to the new “Democratic Socialist Republic of the United States.” Maybe, I thought to myself, we’d even get to address Treasury Secretary Paulson as “His Lordship.”
Although Congressional lawmakers yesterday (Thursday) reached an agreement on the principles of a new bailout deal – an accord that addresses some of my concerns about a lack of accountability – they reacted a bit too slowly and in too self-aggrandizing a fashion. When they should have been hammering out a deal, congressional leaders were, instead, literally tripping over one another as they elbowed their way to the TV cameras, after which they wrung their hands and looked worried on cue, posturing in their thousand-dollar suits in front of a fawning Washington press corps.
What our elected leaders failed to grasp, unfortunately, and still don’t apparently understand, was that this wasn’t about politics. It was – and is – all about global finance. And now more than ever, global economic issues reach from Wall Street to Main Street, meaning those issues will affect you and me.
So, even though the now-adulterated version of the deal apparently now includes a modicum of accountability, it still is going to add billions of dollars in new debt to the U.S. federal balance sheet. And particularly with the already-brittle U.S. economy, we’re hard-pressed to see how Americans will be able to afford a $700 billion taxpayer-funded bailout in any form.
That’s $700,000,000,000.00, with a capital “B” and – count ‘em – 13 zeros.
Even in its revised form, the consequences will hang over us for years, and that means this is no time for investors to be speculating, nor is it time to put the proverbial “pedal to the metal.”
However, it is time to think about the following:
- Virtually any bailout plan – regardless of its format – will ultimately saddle the incoming president and the American people with trillions of dollars in debt that will actually dwarf the U.S. economy’s actual output as measured by gross domestic product (GDP). This means that investors must plan for much-higher interest rates – rates that are so high, in fact, that they could easily choke off U.S. growth well into next year.
- The dilutive effect of $700 billion – not to mention the additional trillions of dollars that still are not recognized as “problem assets” – will be extreme. U.S. inflation could spike overnight. And the U.S. dollar has a higher-probability than not of cratering from here. (We hope we’re wrong on this point, incidentally, but we’re not optimistic). This reinforces the investment case for commodities, in general, to begin moving far higher as we have suggested for some time, now.
- At the same time, global growth will continue. In fact, in the years to come, the world’s healthiest overseas markets could more than make up for the unmitigated disaster that America has become lately.
The bottom line is this: For the foreseeable future, global investing is the way to go.
We can make the case that things will improve in the United States one day and we’ll welcome the market’s return to normal.
In the meantime, however, more than 78% of the world’s economic activity is taking place outside U.S. borders. And that’s worth noting. According to International Monetary Fund (IMF) reports, China’s on track for 9.8% growth this year, and at least 9% in 2009. Taiwan and Brazil are projected to advance at rates of 4.3% and 4.8%, respectively.
So, it only makes sense to “follow the money,” even if we can’t pronounce where that money is going. Not only are the companies in many often-overlooked regions stable, many still are growing at double-digit rates.
For those of us who are north of 50 or closing in on retirement, it’s important to note that many of these stocks pay dividends that dwarf the anemic 2.5% average payout of a U.S. Standard & Poor’s 500 company. For instance, companies in New Zealand routinely pay dividends averaging more than 8%. Taiwanese stocks commonly feature dividend yields of 5% or more. Many pay even higher amounts.
We’ve repeatedly talked about how much of a difference dividends can make in your portfolio. But for you speed readers out there, here’s an investing fast fact: If you invest $50,000 in a U.S. stock paying 2.5% a year, you’d accumulate $64,000 in 10 years (excluding capital gains).
That’s a 28% increase based on dividends alone.
But that same $50,000 invested in a New Zealand exporter (with an 8.6% dividend yield) would leave you with $114,000 – a return of 128%, from the income alone. In short, by picking a stock with a superior dividend payout, you ended up with 78% more money over that decade-long stretch.
And that’s worth something these days – even if our own dollar might not be.
[Editor’s Note: In an open letter to U.S. Treasury Secretary Henry M. Paulson, Federal Reserve Chairman Ben S. Bernanke, and the U.S. taxpayers this week, Money Morning Contributing Editor R. Shah Gilani proposed an alternative to the Paulson Bailout Plan, and to the other credit-crisis plans being cobbled together in Washington. And for readers who support this approach – which is designed to cost taxpayers little or nothing – we’ve created ways to send Gilani’s credit crisis plan along to lawmakers and the state governors from all 50 states. We urge you to check this story out.]
News and Related Story Links:
- Money Morning Investigative Research Report:
Dear Hank: Here’s How to End the Credit Crisis at No Cost to Taxpayers.
- Money Morning Investing Strategies Story:
How Dividend-Paying Stocks Can Help You Tame the Bear.
- The Huffington Post:
Dirty Secret Of The Bailout: Thirty-Two Words That None Dare Utter.
Lawmakers reach deal on rescue-plan principles.
Henry M. “Hank” Paulson Jr.
- The New York Times:
Follow the Money.
Section 8 (Military).
- Money Morning Investment Strategy Story:
Five Ways to “Follow the Money” to Global Profits, In Good Markets and Bad.
Gross Domestic Product.
- Web Site:
International Monetary Fund (IMF).
About the Author
Keith is a seasoned market analyst and professional trader with more than 37 years of global experience. He is one of very few experts to correctly see both the dot.bomb crisis and the ongoing financial crisis coming ahead of time - and one of even fewer to help millions of investors around the world successfully navigate them both. Forbes hailed him as a "Market Visionary." He is a regular on FOX Business News and Yahoo! Finance, and his observations have been featured in Bloomberg, The Wall Street Journal, WIRED, and MarketWatch. Keith previously led The Money Map Report, Money Map's flagship newsletter, as Chief Investment Strategist, from 20007 to 2020. Keith holds a BS in management and finance from Skidmore College and an MS in international finance (with a focus on Japanese business science) from Chaminade University. He regularly travels the world in search of investment opportunities others don't yet see or understand.