After the Dam Bursts

Yes today was a "melt-up." A nearly 1,000 point rebound in the Dow as short-covering (yes, short-covering, that latent buying power which is a function of every short sale, which has been conspicuously absent the last 10 days or so while the market was cratering) helped revive a Wall Street and other global markets discovered Friday without a pulse.

The world's leaders and central bankers have burst the dam, sending a wall of financial liquidity, government guarantees, commercial paper facilities, bank equity injections and interbank lending incentives rushing down the valley to quench the raging fires of deflationary debt destruction.

It is important to note that bursting this dam is a ONE-TIME solution, the mother of all silver bullets. Once all the water has drained from the lake behind the dam, those "hot-spots" of lending fear, increasing unemployment, collapsing consumer demand, bankruptcies, and flights to safety are likely to spark again, beginning another conflagration which will be even more difficult to extinguish without igniting worldwide hyper-inflation.

It is now estimated by Morgan Stanley that the new president, his administration and Congress realistically will be facing the prospect of a $2 trillion budget deficit for Fiscal Year 2009, which ends September 30th of next year. This is up from a mere $1 trillion "worst-case" scenario envisioned only a month ago, and the $650+ billion deficit for FY 2008.

When Fannie Mae and Freddie Mac debt obligations are included as a component of national debt, and if the $2 trillion FY 2009 deficit materializes along with at-best stagnant economic growth, the United States will be at an economically unsound and unenviable position of national debt equal to or exceeding its Gross Domestic Product, about $14 trillion.

Apres le deluge, que prochain? (After the flood, what next?)