The short answer is the yield curve is starting to widen, Congress is going on another spending spree, the market thinks rate hikes are nearly done, and the FED is likely to be printing more money for more government handouts. That combination is more important than a US$ that has somehow held together in the face of the above.

Let’s take a look at the long version.

On Friday, Sept 16th, Bush rules out tax hikes to pay for Katrina.

President George W. Bush, facing alarm from conservatives over the soaring cost of post-Katrina rebuilding, said on Friday the U.S. budget could handle the expense and he would not raise taxes to pay for it.

“It’s going to cost whatever it costs,” Bush said at a joint news conference with Russian President Vladimir Putin as estimates circulated in Washington the cost could hit $200 billion, exceeding the cost of the Iraq war.

Responding to concerns among fiscally conservative Republicans, Bush said his administration would work with Congress to make sure the money was wisely spent and that he would look elsewhere in the budget to make offsetting cuts.

“But I’m confident we can handle it, and I’m confident we can handle our other priorities. It’s going to mean that we’re going to have to cut unnecessary spending,” Bush said.

The president made clear raising taxes was not an option to help cover the costs.
“We got to maintain economic growth, and therefore we should not raise taxes,” Bush said, noting Americans were already paying “a tax in essence” because of higher gasoline prices. “And we don’t need to be taking more money out of their pocket.”

I do not know about you but isn’t “It’s going to cost whatever it costs” just a little too nonchalant for something that might cost up to $200 billion? Given that we are still wasting money like mad in Iraq I doubt it catches the waste over there, but then again underestimating the stupidity of the government is seldom a wise thing to do.

As for “It’s going to mean that we’re going to have to cut unnecessary spending”, gee don’t we have a Republican Congress and a Republican president? Given that is the case, why is it we have “unnecessary spending” in the first place? Could that be because Bush has signed every appropriations bill ever sent to him? Where is this party of reduced government spending, smaller government proponents etc? Perhaps the simple explanation is that for all practical purposes we do not have either a Republican Congress or a Republican President.

The only person being honest was White House economic adviser Allan Hubbard who offered this comment: “There’s no question that the recovery will be paid for by the federal taxpayer and it will add to the deficit”.

Perhaps President Bush should get together with Tom Delay when it comes to “unnecessary spending”. After all, on September 14, the Washington Times reports DeLay declares ‘victory’ in war on budget fat.

House Majority Leader Tom DeLay said yesterday that Republicans have done so well in cutting spending that he declared an “ongoing victory,” and said there is simply no fat left to cut in the federal budget.

Mr. DeLay was defending Republicans’ choice to borrow money and add to this year’s expected $331 billion deficit to pay for Hurricane Katrina relief. Some Republicans have said Congress should make cuts in other areas, but Mr. DeLay said that doesn’t seem possible.

At this point Mish has two questions:

  1. Mr. President is Tom Delay off his ever loving rocker or are you?
  2. Tom Delay is President Bush off his ever loving rocker or are you?

Clearly one of you is clueless. Which is it?
Given that the budget deficit before Katrina was over $330 billion, and given that president Bush has yet to veto an appropriations bill (or any bill for that matter), I vote that both Bush and Delay are clueless.

The Washington Time continues….

“This is hardly a well-oiled machine,” said Rep. Jeff Flake, Arizona Republican. “There’s a lot of fat to trim. … I wonder if we’ve been serving in the same Congress.”

American Conservative Union Chairman David A. Keene said federal spending already was “spiraling out of control” before Katrina, and conservatives are “increasingly losing faith in the president and the Republican leadership in Congress.”

“Excluding military and homeland security, American taxpayers have witnessed the largest spending increase under any preceding president and Congress since the Great Depression,” he said.

Meanwhile breitbart.com is reporting
Katrina Ushers in Return of Big Government
.

The era of big government is back. President Bush is presiding over what is sure to be the most expensive government relief and reconstruction operation in U.S. history.

With estimates of the federal tab ranging up to $200 billion for rebuilding New Orleans and other storm-ravaged Gulf Coast cities, Bush and his Republican allies in Congress are casting aside budget discipline.

Hurricane Katrina also opened the floodgates to proposals in Congress building on a host of long-cherished Republican themes. These include proposals for school vouchers for storm-displaced children, more federal support for “faith-based” organizations engaged in hurricane relief, as well as business-friendly “enterprise zone” tax credits for enterprises that rebuild in stricken areas and eased environmental and labor-protection requirements.

“The fact of the matter is when our nation faces these type of emergencies, it unfortunately requires us to deficit spend. It’s nothing that anybody in Washington, or anywhere for that matter, likes to do but it’s necessary,” White House counselor Dan Bartlett said ahead of Bush’s Thursday night speech to the nation.

Some fiscal conservatives are expressing alarm.

“It is inexcusable for the White House and Congress to not even make the effort to find at least some offsets to this new spending,” said Sen. Tom Coburn, R-Okla. “No one in America believes the federal government is operating at peak efficiency and can’t tighten its belt.”

Government failures at the federal, state and local levels are being widely blamed for the anarchy and loss of life in the early days after Katrina slammed into the Gulf Coast on Aug. 29.

“Yet now everybody says government is the answer. It’s baffling,” said Ronald D. Utt, who studies federal public works spending for the conservative Heritage Foundation.

Mish apologizes for having more questions but here they are:

  1. Given that the era of Big Government is back, just when did it go away?
  2. Why should “faith based” organizations get any federal money?
  3. Why does it take a disaster to tighten one belt?
  4. Why not tighten ahead of time so money is there in case of a disaster?
  5. Government has proven without a doubt that it is the problem and not the answer so why is there more clamoring for more government now?

Briebart continues:

Sen. Edward M. Kennedy, D-Mass., proposed that Congress create a Gulf Coast Redevelopment Authority, modeled after the Tennessee Valley Authority, to oversee the reconstruction. TVA, created during the Depression as an independent federal agency, is widely credited with the revitalization of the seven-state Tennessee Valley region.

Other lawmakers have called for a domestic version of the Marshall Plan that helped revive Europe after World War II, or something akin to President Franklin D. Roosevelt’s Work Projects Administration, which put millions of unemployed people to work mainly on road, bridge and dam projects during the Great Depression of the 1930s.

Obviously there is nothing like a disaster to get idiots chirping on both sides of the aisle. These people want to help. At least I think they do. But barring an unexpected and extremely unlikely mass rush of Congressional sanity, the best thing they can do is nothing.

On that note we should all be praying that Congress does nothing since Barrons is now asking Will Congress Bail Out Gulf Coast Bondholders?

House Speaker Dennis Hastert, the Illinois Republican, says that Congress is seriously considering a federal bailout of municipal bondholders affected by the vicious storm. Many cities and authorities that were in the path of Katrina may be unable to meet interest payments come Oct. 1, because they can’t collect the taxes needed to meet these obligations. The federal government is mulling some kind of guarantee, valid through the end of 2006, that would keep the issuers from defaulting.

The bailout idea appears to have originated with the National Association of Bond Lawyers in its Sept. 7 letter to both the Department of the Treasury and the Internal Revenue Service (Re: Hurricane Katrina Relief and Rebuilding-Municipal Market Needs).

Bond lawyers quickly found allies in Louisiana Republican Rep. Jim McCrery and Mississippi Republican Sen. Trent Lott. McCrery says bondholders never anticipated Katrina and should get federal help.

Kotok has some problems with McCrery’s logic. If Congress were to follow through, then it might create an implied federal guarantee for bonds issued by other high-risk communities, he says.

The perception that Uncle Sam would protect bond holders from Mother Nature would distort the market’s risk-reward pricing mechanisms. In effect, all bonds in communities along the San Andreas fault or in Tornado Alley would trade as if fully protected against natural catastrophes. This would pave the way for projects that otherwise wouldn’t be built.

Nothing like a bunch of bond lawyers asking for a Federal bailout because their clients underestimated the risks of a bunch of municipal bonds, is there? No doubt such a relief package will be stated to benefit Aunt Martha who has just one muni in her portfolio while the real beneficiary is some large bank holding thousands of those municipal bonds.

The worst problem is the moral hazard this would create for all municipal bonds. If the government is going to bail out every disaster and every bankruptcy then bonds have no implied risk and everyone will be jumping into to them.

NO! The very best thing Congress can do on this issue is nothing. Don’t get your hopes up. When it comes to spending and big government this Congress and this President have no bounds.

Of course no story could be complete without the likely next FED chairman chiming in with a bunch of nonsense. Let’s take a look at what $Ben “Helicopter drop” Bernanke has to say in this piece entitled Katrina’s economic hit palpable.

Hurricane Katrina will hurt the U.S. economy in the short run but bright long-term prospects mean the Bush administration can push ahead with its reform agenda, a top White House economic adviser said on Thursday.

“In the shorter term, the devastation wrought by Hurricane Katrina will have a palpable effect on the national economy,” White House economic adviser Ben Bernanke said in prepared remarks for delivery at the National Press Club. But he said private-sector forecasts were for healthy long-run growth.

Bernanke said the White House intends to continue pursuing policies that have make the economy able to withstand shocks and that will keep growth on track.

“These policies include making tax relief permanent, reducing the budget deficit by limiting spending, strengthening retirement and health security through efforts like
Social Security reform … and enhancing energy security,” Bernanke said.

Yep, nothing can stimulate gold more than cutting taxes while dramatically increasing spending. Those holding major positions in gold thank you Mr. Bernanke, President Bush, and Congress for a nice 1-2-3 punch.

If none of that has sacred you into gold yet, perhaps this will. In a nationally televised address, President George W. Bush said “As long as I sit in this chair, all future catastrophes will be planned by me.”

Mike Shedlock / Mish/