THE SHARPEST INVESTOR - UNCLE SAM

Amazing, all are concerned about the cost to the tax payer of the massive Fed effort to stop the financial meltdown and revive the economy. And they have reason to be concerned, that effort is not coming out of current income, but out of debt. To make it crystal clear, the Feds are borrowing to finance this deficit spending. And this debt in the form of Treasury Bills (T-bills) is being scooped up like candy by kiddies.

The typical observer would assume that as Federal debt goes up, the cost for the Feds to borrow will increase. You know, the more you are in debt, the riskier additional loans become. But guess what, the cost for the Feds to borrow is currently "zero." Yes, it costs the Feds less than the inflation rate to borrow. When the cost of borrowing is less than the inflation rate, you have to borrow, since you will pay less for the loan in future dollars than the amount you receive now in current dollars. You really do get something for nothing.

Again, the way is works is that Uncle Sam issues bonds, T-bills, that investors buy and treat "as good as cash." He then uses the proceeds for the TARP and other new devices for him to acquire assets. He now owns major stakes in the largest banks, the heart of the mortgage industry, the largest insurance company, and major stakes in two auto makers. BUT MORE IMPORTANTLY, HE IS BUYING THIS STAKE FOR NO COST SINCE HIS BORROWING COSTS LESS THAN THE INFLATION RATE.

Wow, I sure wish I could get money for nothing to build my asset base. Who would turn this down?

Enter the naysayers. They warn that Uncle Sam is running up a monster deficit. Yes, the borrowing is against future income. But if the "zero" interest rate continues, the tax payer will pay less in future dolars, than the cost of financing the deficit in current dollars. The tax payer is getting more for his money than he would normally.

More importantly, the assets Uncle Sam is acquiring have a value. They provide current income and future capital gains. As I mentioned in an earlier note, Uncle Sam has already gained 3.2% on his TARP investment in major banks in one month! And as I also noted, Uncle Sam does not have to pay capital gains tax on future earnings nor any taxes on current income.

I predict that the assets being purchased by the Feds now, will, say over the next decade, pay back more than their present cost. In other words, Uncle Sam will wind up buying assets at no real cost, and these assets will pay off his borrowing to buy them. Who would have thunk that Uncle Sam would be the ace investor on Wall Street?

Leo Cecchini