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Who Will TARP America?

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Last week the nation's number one trucking company, YRC Worldwide Inc., announced that it will seek $1 billion in TARP assistance to bailout the company's pension plan. Never mind the fact that the request is light years away from the original intention and approval given by congress to purchase toxic assets from banks' balance sheets. The point is that the troubled company's request of the government to cover its pension obligations should remind us of the bigger issue; who will bailout our country's pension plan and can the USA TARP itself?

The question has particular saliency given the recent release of the Medicare and Social Security Trustees report. The report provided more sobering news about the long and short term insolvency of our nation's retirement plans and revealed the problem of funding our nation's entitlement programs is becoming much worse.

The Social Security trust fund will run out of assets four years earlier than previously forecast. It should be noted at this time that the continued belief in the existence of any government trust fund (including FDIC insurance) is tantamount to a belief in the tooth fairy, because the special-issue bonds will need to be redeemed just as would any ordinary Treasury obligation. Therefore the only date of importance is the date at which expenditures exceed revenues, which in the case of Social Security, has been moved up one year to 2016. The report also bumped up the amount needed over the next 75 years to fulfill its benefit obligations by $5.3 trillion.

Medicare, which is by far the bigger issue, is already in a cash flow negative situation. Medicare Part A turned cash-flow negative in 2008, as payments exceeded revenue by $21 billion. The trust fund is projected to run out in 2017, two years sooner than predicted just last year.

How big is the entire problem you ask? According to the Trustee's report, if you add together the unfunded liabilities from Medicare and Social Security, it comes to more than $100 trillion over the infinite horizon-talk about the mother of all bailouts. There is no doubt in my mind that if the government conducted a stress test on its own ability to remain solvent given the amount of entitlement program spending we face; they would receive a failing grade.

A study done by the Center on Budget and Policy Priorities shows that for 2/3 of Americans over age 65, Social Security provided half or more of retirement income. As for the remaining third, it provided 90% or more! That is why any proposed reductions in benefits will face an impenetrable line of defense from AARP and other lobbying groups which represent retirees-a voting bloc with increasing numbers and influence. When you factor in the wealth decline from the Dow Jones Industrial Average that has declined 42% from its October 2007 high, home prices that are off 31% from their high water mark set in 2006, and the decline in influence of most private pension plans, you understand that the reliance on entitlement programs is increasing substantially.

So back to the original question: Who will bail out the USA? Up until now it has been foreign Central Banks. For instance, the Chinese now have $1.9 trillion in currency reserves of which $740 billion are in US Treasuries. The notion that they will continue to provide the United States with an unlimited supply of Treasury demand is specious in nature. Premier Wen Jiabao has already expressed his concern over his country's concentrated dollar position. Additionally, the Chinese have a waning trade surplus and their own stimulus program to fund. This means that they may not have the desire or the means to fund our ballooning debt.

Increasing taxes have been proposed by some to close the gap. In reality imposing new taxes or increasing existing tax rates does not necessarily equate to increased revenue. In fact, an increased tax burden imposed on this already fragile economy may prove to have the opposite effect on government income.

A partial solution is to grow the economy as much as possible. But the truth is that the antithesis of growth is what is being deployed. Higher taxes, inflation and debt are the antidotes to growth and will only exacerbate our funding issues.

That leaves the Federal Reserve in charge of bailing out the entire country. TARPer in Chief Banana Ben Bernanke--who has unlimited counterfeit funds to deploy--will be looked to once again to provide relief by leaving interest well below inflation and keeping the monetary base incredibly high. The worst fear of all is that he will be the buyer of last resort and purchase an ever increasing quantity of US Treasury debt. Any relief experienced by his prodigal efforts will be fleeting. Unfortunately, we will have to learn the hard way that inflation solves nothing and seeking a panacea through the printing press leads to perdition.

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Michael Pento is the Chief Economist for Delta Global Advisors and a contributor to greenfaucet.com