The economy is “capsizing”, said Alan Abelson in Barron’s. Unemployment jumped to a 14-year high of 6.5% in October and the annualised pace of car sales hasn’t been this slow since 1983. Parcel delivery group DHL will slash 10,000 jobs and electronics retailer Circuit City filed for bankruptcy after its suppliers withdrew credit lines and shoppers ran out of easy credit.
And the bill for taxpayers is mounting. This week the Fed extended its credit line to ailing insurance giant AIG to $150bn from $85bn. Credit-card group American Express won approval to become a bank, allowing it to tap the Fed for funding now that the market for securitised credit-card debt has closed. Meanwhile, the authorities plan to ease repayment terms on mortgages offered by state-backed Freddie Mac and Fannie Mae to halt the tide of foreclosures, which is unlikely to come cheap. Then there’s General Motors, weighed down by “cars that Americans won’t buy” and “rich and inflexible” labour contracts, as The Wall Street Journal put it. It apparently needs at least $14-$16bn to keep going. “What next, the airlines? What about Starbucks?” said one congressman.
The cost is rocketing
The Treasury could end up borrowing $1.5trn-$2trn in 2009, reckoned Scott Minerd of Guggenheim Partners. And it seems the markets are starting to worry about America’s credit risk. The yield curve has steepened: long-term bond yields are rising as these bonds have been marked down and the cost of insuring US government debt against default has jumped sharply. Even Uncle Sam’s credit line, said Randall Forsyth in Barron’s, “has its limits”.