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Big Problems Ahead

Over the last few weeks the financial markets have been smiling as equity prices have been rallying.  Report after report has come out suggesting that things are still bad, but they aren't quite as bad as they have been.  Some companies have exceeded earnings expectations, yet others have not.  Most commodities have started to come off of the floor and show signs of life.  Yet in all of this there is very little talk of where the US Federal Government stands.

A report came out today confirming what we all ready know; the US Government is out of money.  However that report somehow got lost in the shuffle and no one really talked about it.  What report am I referring to?  This one titled "AP Enterprise:  Biggest Tax Revenue Drop Since 1932"

"By STEPHEN OHLEMACHER (AP) WASHINGTON - The recession is starving the government of tax revenue, just as the president and Congress are piling a major expansion of health care and other programs on the nation's plate and struggling to find money to pay the tab.

The numbers could hardly be more stark: Tax receipts are on pace to drop 18 percent this year, the biggest single-year decline since the Great Depression, while the federal deficit balloons to a record $1.8 trillion.

Other figures in an Associated Press analysis underscore the recession's impact: Individual income tax receipts are down 22 percent from a year ago. Corporate income taxes are down 57 percent. Social Security tax receipts could drop for only the second time since 1940, and Medicare taxes are on pace to drop for only the third time ever.

The last time the government's revenues were this bleak, the year was 1932 in the midst of the Depression.

"Our tax system is already inadequate to support the promises our government has made," said Eugene Steuerle, a former Treasury Department official in the Reagan administration who is now vice president of the Peter G. Peterson Foundation.

"This just adds to the problem"

Social Security is in danger of running out of money earlier than the government projected just a few months ago. Highway, mass transit and airport projects are at risk because fuel and industry taxes are declining.

The national debt already exceeds $11 trillion. And bills just completed by the House would boost domestic agencies' spending by 11 percent in 2010 and military spending by 4 percent."

Oops.

If I was a betting man (and I'm not based on how dumbfounded I am that we are even where we are) I'd say this rally is running on borrowed time.  Sure stimulus and government spending can get the economy rolling again, but at what long term cost?  Stimulus only pulls forward demand, leaving a hole where that demand would normally be in the future.  Cash for clunkers is a great example of this, so is the first time home buyer housing credit.  Please understand what this report is saying because it confirms what you already know.  Your government does not have enough income to support its spending habits.  Can anyone guess what happens when someone or some entity spends more money than it makes for a prolonged period of time?

I wonder how many more balance transfer Barack Obama, Tim Geithner, Ben Bernanke, and the US Congress have left from CitiGroup's last credit card promo? 

So now what do you think about this rally?

*For those of you following my 10 step recovery piece, I will be hosting the second portion later this evening or tomorrow morning.  I will cover steps 1-3 in great detail, so stay tuned.