Dear Value Seeker,

Yesterday, President-elect Barack Obama finally admitted what had been glaringly obvious for some time.

“Potentially we’ve got trillion-dollar deficits for years to come, even with the economic recovery we are working on.”

Obama’s statement underscores the government’s absolute commitment to Keynesian policies to ‘fix’ this economic crisis.

Uncle Sam has already allocated $700 billion of your and my money under the Treasury’s Troubled Assets Relief Program. And Obama has indicted that he will sign into law another gargantuan bailout package of about $800 billion by the end of the month.

Congressional budget estimators today forecast a deficit of $1.2 trillion in the 2009 fiscal year. And that’s before the Obama ‘stimulus’ plan is included!

The brutal reality is that nobody knows how much more taxpayers’ money the feds will throw at the problem over the years. Or how much tax revenue will be lost as unemployment soars. Or how much extra tax revenue will be needed to pay for the rising costs of benefits programs.

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This morning, ADP Employer Services reported that the US economy lost 693,000 non-farm in December. Economists were expecting a figure around half a million.

The official labor report for December will be released on Friday. If job losses reach 700,000 – a fair estimate based on today’s numbers – it would be the biggest monthly drop for 59 years.

If a $1 trillion dollar deficit – which was unimaginable just a few months ago – is practically assured, then $2 trillion certainly isn’t off the cards.

This dire fiscal outlook isn’t lost on Obama. As he braces the country for a trillion-dollar deficit, the incoming president is pledging to bring a “long-overdue sense of responsibility and accountability to Washington.”

What a novel idea…

Of course, he has to say that. Reassuring investors is critical to keeping down interest rates on America’s huge borrowing needs.

It is less obvious exactly how he will go about instilling this sense of accountability and responsibility in a place that has suffered from a market lack of both for a very long time.

After all, fiscal reform is a daunting challenge, even in times of economic prosperity and budget surpluses.

In the US today, 44 states face budget crises, according to the Centre on Budget and Policy Priorities.

California is considering delaying tax refunds starting next month, according to the LA Times. The state is running out of ideas on how to contain a budget gap set to reach $41.6 billion by the middle of next year, not to mention the long-running issues with Medicare and social security.

In a recent commentary for the Federal Reserve Bank of St. Louis’ Regional Economist, fed wonk Michael Pakko says:

The retirement of the Baby Boom generation and a slowing rate of growth in the labor force will create a demographic time bomb in which entitlement growth threatens to swamp available resources.

As mentioned earlier, the Social Security trust funds are projected to begin running down in 2017. By 2041, they are expected to be depleted. One way of measuring the long-run shortfall is to estimate the present value of unfunded obligation … in today’s dollars to pay for future promises in excess of expected tax revenues. In the case of Social Security, the U.S. Treasury estimates that paying promised benefits through the year 2081 would require $6.8 trillion, in addition to taxes collected under current law.

The situation is even more dire when we consider health-care costs. The unfunded obligations of Medicare parts A and B amount to a present value of $25.7 trillion. Medicare Part D (prescription drug coverage) adds another $8.4 trillion. All told, the shortfall for government social insurance programs comes to a present value of $40.9 trillion. This is the government’s official estimate—some private sector economists suggest that the total burden is even greater. Economist Lawrence Kotlikoff has recently estimated the total unfunded liabilities of current federal programs at $70 trillion.”

$40 trillion in unfunded liabilities! $70 trillion!! Make no mistake about it: Our government’s short-term ‘fix’ is setting us up for even greater problems in the future.

As Economist Max Wolff comments on Seeking Alpha:

Fiscal policy – like credit expansion – allows money to be borrowed and spent now against future profits, earnings and reduced spending. Like the credit it relies on, fiscal policy injects more spending today at the cost of less spending tomorrow.

The only way out of that is to default tomorrow.

Of course, by the time 2081 rolls in, today’s dollar will be worth a heck of a lot less thanks to the Fed’s policy of inflation.

$1,000 in 1970 has the same spending power as $5338.36 had in the year 2007.

Who knows how debased one thousand of today’s dollars will have become in 40 years’ time.

On to today’s picks…

Right or wrong, Beijing’s version of economic stimulus is far bolder than Washington’s, relative to the size of the economy.

Money Morning’s Don Miller says this means great investment opportunities right now. He says the best places to profit from the Chinese stimulus are the infrastructure, consumer goods and energy sectors.

Don picks seven undervalued stocks that have a bright future with China’s economic growth story.

The Sovereign Society’s David Newman says worrying over the daily fluctuations in today’s market is pointless. Great long-term opportunities are still out there.

He says General Electric (NYSE:GE) is a good example of a stress-free investment.

The company is one of America’s few true top-grade businesses, and it’s likely to emerge strongly from this crisis.

Best of all, GE’s high and consistent dividend payments mean investors will enjoy regular income while they wait for the rebound.

Meanwhile, Manraaj Singh at Fleet Street Invest says investing in oil now could be the trade of the year.

Geo-political tensions are rising in the global energy market. And OPEC states will do what it takes to bring crude oil prices back to levels that support their state budgets.

Buying into undervalued oil majors is a good tactic. But Manraaj says quality mid-sized oil companies that are best placed to return big profits in the next oil bull run.

Finally, Irwin Greenstein, writing for Contrarian Profits, says America’s mega bailouts could end up creating good investment openings in Asian economies.

Washington’s handouts to terminally ill businesses will reduce valuable spending on new and exciting productive sectors.

This will harm America’s long-term competitiveness against Asian countries such as China and South Korea.

Happy hunting,

Will Bonner

Publisher,

Hidden Value

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