Sprott: Dead government walking

Some required reading from Eric Sprott, CEO and portfolio manager of Sprott Asset Management. After indentifying GM, Fannie Mae, and Citigroup as ‘dead men walking’ in his Markets at a Glance newsletter of November 2007, he returns to the ‘dead men walking’ theme - this time with a different spin.

“Why the walk down memory lane? The equity market performance in November 2007 masked the underlying problems plaguing the financial system at the time, and it is blindingly apparent that it is doing the same again today. The government has assumed most of the financial system’s liabilities in a giant game of ‘kick the can’.”

What is the size of the unfunded obligations assumed by the Federal Government in 2009? you may ask. He cites John Williams’ Shadow Government Statistics service, which puts Total Federal Obligations (GAAP) at $74.6 trillion in 2009, a $9 trillion rise from last year. This takes unfunded obligations to over 5x annual GDP.

“It’s time for another surreality check, but this time it isn’t the publicly traded companies that deserve attention, it’s the governments that have saved them. Make no mistake – the dead men are still walking – they’re just a lot bigger now than they were two years ago, and they don’t generate earnings – they print money and tax their citizens…

…As we stated in a previous article, in order to satisfy US capital requirements, all existing investors would have had to increase their US bond purchases by 200% in fiscal 2009. Foreigners, however, only increased their purchases by a mere 28% from September 2008 to July 2009 – far short of what the government required…

…The bottom line is that there is serious cause for concern here – and don’t be fooled into thinking this crisis will fix itself when (and if) the economy recovers.”

We fear the real crisis is going to blindside most analysts once they realise they don’t even know the difference between fiat money, commodity money, and credit money. On the other hand, perhaps capitalism and the free market will take the blame again, giving economists and analysts another ‘get out of jail free’ card. Over to Mr Sprott:
Sprott: Dead Government Walking October 2009