Thursday, December 18, 2008

WE'RE IN THE MONEY

In my last blog I said Uncle Sam is now borrowing funds, i.e. selling Treasury Bonds (T-Bills), that pay "zero" or "negative" interest which means interest rates that are less than the inflation rate. He is using this "free" money to buy private sector assets. One example has been using the "TARP" fund to buy a large stake in major banks. Well that initial $250 billion buy has already delivered a gain for Uncle Sam. It is calculated that his stake in the banks has yielded a 3.2% gain in one month! Any investment adviser would be overjoyed to see his client's portfolio do so well.

And just think, Uncle Sam should wind up with maybe $3 trillion worth of assets. Now not all will pay as well as the bank shares, but we can expect an average rate of return of at least 5% per year (a truly modest estimate since he already earned 3.2% on the bank buy in one month). That would mean $150 billion a year, a good new revenue stream for Uncle Sam.

Even more stunning to contemplate is the fact that, when Uncle Sam sells these assets for a profit, he will not have to pay capital gains tax. For that matter, he will not pay one nickel in tax on any of his earnings.

As far as I am concerned I would applaud Uncle Sam buying as much of private sector assets as he can. It simply means that he will have less need to tax me. Think of the Vatican that earns more from its assets than from donations.

We are truly on the cusp of a dramatically "new" economy.

Leo Cecchini

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