These are very comforting comments for the market, and so we see that it’s rallying up again today.  The optimism in the market right now is at some pretty high levels.  The stock indexes are pushing ever closer to their pre-2008 crash levels.

Bernanke did however say that he is concerned that this recent improvements in unemployment may be temporary and short-lived.  This is another reason the Fed is not ready to tighten monitary policy yet.

Most of us would like to slap someone like this up side the head. But this is exactly what our government is doing right now. I would love to hear your comments and feedback.

This 13% increase in the traditional turkey dinner costs includes a meal of the following for 10 people:

• 16 pound turkey
• Bread stuffing
• Peas
• Sweet potatoes
• Rolls
• 1 lb relish tray of celery and carrots
• Pumpkin pie with whipped cream
• Milk & coffee

Writing this post is already making me hungry, I’m not sure if I can wait until Thursday for the feast!

But in all seriousness, this rising inflation should sound an alarm to everyone out there.  Costs of the things we use every day are increasing rapidly while many Americans are unemployed or underemployed.  Inflation has historically averaged about 3.5% over the last 75 years or so.  But there have been periods of time where it was much higher than that.  Most of you remember the 80′s when mortgage interest rates were well into the teens.  In fact, a 12% interest rate on your mortgage would have been very good at one time.  I only mention mortgage rates because they do tend to be tied to overall inflation rates in general.  Mortgage rates right now are very low.  In fact, mortgage rates are now much lower than the inflation rate of food, medical care, and housing.

One of the important aspects of personal financial planning is diversification.  Everyone knows that you should diversify your retirement assets into various classes to protect yourself from everything going down at once.  Diversification also protects you from missing out on an investment class that grows at a rate far greater than other classes.  If you have part of your assets in that class you’ll be able to take advantage of that increase.

Buying insurance is another way to diversify your assets.  Putting part of your money into an insurance policy to protect you from a significant loss makes good sense.  I’ve always supported buying insurance for the big things that could creast a catastrophic loss.

I want to suggest today another way to diversify your assets, and protect yourself from major losses.  This may seem crazy to some of you, but to many who are already doing this, it makes perfect sense.  I think every family needs to put some of their assets into buying extra food and other household consumables.  Having a supply of food daily consumables will protect you against rising inflation.  In fact, if you were able to use food today that you bought 1 year ago, you would have essentially earned 13% on the money you invested into that food.  I’ll bet you didn’t make that in the market last year.

Now I know that not all food items can be stored that long before use.  But there are a lot of ways to store food for much longer than a year.  Many canned goods and dry food items are packaged in a way that they can be used well over 1 year later.  Powdered milk and powdered eggs can also be purchased and stored for well over a year.  Wheat, which can be ground into flour can be stored for up to 25 or 30 years.  There’s a ton of information on the web about building up a food storage for your family.

You could also invest some of your assets into food and aggriculture stocks.  But if food becomes difficult to get, you can’t eat your shares of stocks.

We are experiencing food shortages in many parts of the world right now.  This could continue to affect food prices going forward.  Food costs rose by 13% this last year, how much will they go up this next year?

Now I’m not say to go dig a bunker in your backyard and prepare for the end of the world.  What I am saying is to just buy a little extra each time you go to the store.  Find things on sale and buy a few more of them than you normally would.  Turn an extra closet into a food storage pantry and start filling it up.  Gradually build up a storage of food and household supplies as an easy way to protect yourself from rising costs.  And if inflation really gets out of hand down the road, you’ll be glad you did.

Judging from President Obama’s impactful speech last evening, the Administration has at long  last recognized the severity of America’s unemployment crisis and the need for a comprehensive policy response.

U.S. President Barack Obama, flanked by Vice President Joe Biden and Speaker of the House John Boehner, addressed both houses of the U.S. legislature to highlight his plan to create jobs for millions of out of work Americans on September 8, 2011 in Washington, DC.

The program is a credible attempt to address structural obstacles that undermine economic growth and employment.  Its effectiveness, however, is hostage to two factors that will become clearer
over the next few days.

Let us start with the good news.

After a painful and, for many, inexplicable delay, the Administration is finally shifting from an ineffectual series of ad hoc measures to a comprehensive program that targets key impediments to job creation.

The emphasis is rightly on employment incentives, labor market reforms, infrastructure, and improving the
functioning of the mortgage market.  There are even efforts, albeit even more limited in nature, to bypass clogged credit pipes, alleviate pressures facing our schools, and reduce bureaucracy. And there is a token attempt to
provide more summer jobs for teenagers.

I suspect that many would agree with me that, having finally identified the key areas, the President should have
been much bolder upfront — proposing deeper, more ambitious and more detailed structural reforms.

Yet he deserves the benefit of the doubt as he did point to the possibility of reinforcing the program over
time.

Now, for the bad news.  The effectiveness of this program is far from guaranteed as two big — and critical issues — are outstanding.

First, we have to wait until next week for the fiscal component of the program. Specifically, the cost of today’s announcements needs to be offset over the medium-term by credible reforms to both taxes and budgetary spending. Second, it is not clear whether this inherently centrist program will succeed in sufficiently bringing together a highly polarized congress.

Democrats and Republicans now have a choice. They can either coalesce around the President’s program, drawing comfort from individual elements that appeal to them; or they can hold out for more and, in the process, turn the pursuit of their personal best into an enemy of the public good.

A lot is at stake, especially for those that have been jobless for too long but also for American society as a whole. Let us hope that Washington is, collectively, able and willing to follow through. If it does, tonight’s speech could well mark the initiation of America’s economic Sputnik moment.

A bond trader looks on as Treasuries rally.

This weekend the US Treasury was downgraded by Standard & Poors from its AAA credit rating to AA Plus.  This is an historic event for our country, and not in a good way.  It signals a very real black eye on the financial strength of our system.  This downgrade is now being followed by a string of similar downgrades on other government issued financial instruments, basically anything that has exposure to or is tied to the Treasury.

What is surprising about this rating downgrade is that money is now flowing out of stocks (just like all last week) and going into Treasuries.  You would expect people to be selling the Treasury on this downgrade news, but instead they are buying it.  So there is obviously still a great level of confidence in our Treasury bonds, much more so than our stock market at this point.

What could possibly happen in the future is that mutual funds and other institutional money funds who have rules about only owning AAA paper could be forced to sell the Treasury bonds and other US Govt agency paper.  We could also see selling of our Treasuries by foreign countries that are big holders of our bonds like China and Japan.  But this is yet to be seen.  For now, safe money is flowing into the Treasuries and that is a positive thing.  I think this signals an important fact about the role that the US plays in the global financial system.  No other country is able or willing to be at the center of the global financial system.  As bad as it is here right now, there really is no other better alternative place to park safe dollars.

Here are a few quotes from some of my favorite investment professionals about this downgrade:

“The U.S., which was cut Aug. 5 to AA+ from AAA at S&P, merits a “quadruple A” rating.  Financial markets create their own dynamics, but I don’t think we’re facing a double dip recession,” - Warren Buffett, age 80, yesterday in an interview with Betty Liu at Bloomberg Television.

“The future role of rating agencies will also now come under close scrutiny, bringing to the fore the question of who rates the rating agencies?  S&P’s action will likely unite governments in America and Europe in an effort to erode their monopoly power and operational influence.  This will also force all investors to do something that they should have been doing for years: conduct their own ratings due diligence, rather than rely on outsiders.”  – Mohamed A. El-Erian, CEO and co-CIO of PIMCO.

Only time will tell how this will impact the credit markets.  It could eventually lead to higher interest rates for everyone on things like mortgage rates, credit cards, and car loans, but for now that is not happening.  Money is flowing out of stocks and into bonds.  Washington is pointing the finger at Standard & Poors and the Tea Party for this whole problem.  Standard & Poors is blaming an inept Congress for the problem.  Pointing fingers is not going to solve anything.  Especially while Congress is on vacation.

Don’t take this the wrong way, it is a step in the right direction.  We just need them to take many more, and much bigger steps.

I thought this cartoon said it all…thanks Jack for sending it!

White House Chief of Staff, William Daley

WASHINGTON (AP) — Scrambling to head off disaster, House Speaker John Boehner on Sunday readied a plan to prevent the first government default in U.S. history and said Republicans would act alone if Democrats didn’t go along. The White House said President Barack Obama would veto a plan that failed to extend the nation’s borrowing power into 2013 as time for action drew dangerously close.

On a day of deepening tension, Boehner hoped to outline at least a framework of a deal by 4 p.m. EDT that could get through a divided Congress and avert panic before Asian financial markets opened hours later. The government is on pace to run out of money to pay its bills unless the debt cap is raised by Aug. 2.

Boehner’s plan, still under negotiation on Capitol Hill, would likely cut spending by at least $1 trillion and extend the federal borrowing limit by a slightly smaller dollar amount, into 2012. That’s intended to get the nation beyond this crisis and snag enough votes from House Republicans who won’t raise the debt limit without spending cuts, too.

“I would prefer to have a bipartisan approach to solve this problem. If that is not possible, I and my Republican colleagues in the House are prepared to move on our own,” said Boehner, R-Ohio.

Deeper and more complex reductions in the nation’s deficits would be part of the deal, but under later timelines.

White House chief of staff William Daley said Obama is insisting that any package must expand the next presidential and congressional elections and into 2013 to provide economic certainty. Daley said anything short would be a gimmick and prompt the world to say: “These people just can’t get their act together.”

White House and congressional leaders talked passed each other on the Sunday talks shows as negotiations unfolded in secrecy.

“There will be a two-stage process. It’s just not physically possible to do all of this in one step,” Boehner said amid the White House pushback. “I know the president is worried about his next election. But my God, shouldn’t he be worried about the country?”

Boehner planned to update Republican House members at 4:30 p.m. EDT.

With an eye on the financial markets, Treasury Secretary Timothy Geithner insisted anew that United States would not default.

“It’s just unthinkable,” Geithner said. “We never do that. It’s not going to happen.”

The debt deal-making has consumed Washington for weeks and put on display a government that at times risks utter dysfunction.

Even after talks about between Obama and Boehner broke down in spectacular fashion Friday, Geithner said the two men were still negotiating.

He also suggested the ambitious framework the two leaders had discussed, targeting a deficit reduction of $4 trillion, remained under consideration.

“I don’t know. It may be pretty hard to put Humpty Dumpty back together again,” Boehner said of that grand plan. “But my last offer is still out there. I have never taken my last offer off of the table and they never agreed to my last offer.”

That last offer included $800 billion in new tax revenues as part of a broad reform that would lower tax rates. Obama wanted $400 billion more in tax revenue for deficit reduction to help balance out the spending cuts, he said. Or, if not that, a reduction in some of the proposed cuts being discussed to entitlement programs such as Medicare.

The talks halted primarily over that issue and over how to ensure that both parties kept their reform promises in the months ahead.

Staff members of the congressional leaders from both parties were working to come up with an emergency plan.

Boehner said he wanted it a bipartisanship approach but was ready to move ahead if that didn’t happen.

Any plan must get through the Democratic-run Senate, where Majority Leader Harry Reid, D-Nev., has called a short-term debt limit expansion unacceptable.

Obama’s role looms, too.

Asked if Obama would veto a plan that did not extend the government’s borrowing authority into 2013, Daley said, “Yes.”

One key Republican lawmaker scoffed at the administration’s opposition to a debt-ceiling plan that doesn’t last into 2013.

“I think that’s a ridiculous position because that’s what he’s going to get presented with,” said Sen. Tom Coburn, R-Okla.

Under any scenario, Washington’s leaders have run themselves almost out of time.

It will take days to move legislation through Congress. A default could cause catastrophic damage to the standing and the economy of the United States.

Daley said, in fact, the consequences are already taking hold.

“I don’t think there’s any question there’s been enormous damage done to our credit-worthiness around the world,” Daley said.

I can see the banks point of view.  The Federal Reserve is currently paying them .25% on their $1.4 TRILLION, and they in turn pay you and I about .10% or less, with NO RISK!  Do the math, and it looks pretty good for the banks to keep that money right where it is.

One great way to get that money moving towards the consumer would be for the Federal Reserve to stop paying the banks interest on those deposits.  Or even better, start charging THEM a fee to keep it there.  The banks are going to place the money where it can earn the most, within reasonable risk parameters.  If they were no longer earning risk-free interest, and having to do nothing for it, I think some more money would start to flow.

I would love to hear your thoughts and comments about this matter.  Have a great day!

Federal Reserve chief Ben Bernanke reinforced his call on Thursday for Congress to raise the cap on U.S. borrowing, saying a failure to do so could lead down the same risky path that the failure of Lehman Brothers did.

During a Senate Banking Committeee hearing, Bernanke reiterated catastrophic consequences should Congress either fail to raise the limit on borrowing or edge too close to that limit.

“The worst outcome would be one in which the financial system would be again destabilized, which we saw in Lehman, which would have extremely dire consequences for the rest of the economy,” Bernanke said, referring to the period following the failure of the Wall Street bank Lehman Brothers at the height of the financial crisis in 2008.

Bernanke also said that “using the debt limit as a bargaining chip is quite risky,” reiterating a worry he expressed in a February press conference.

The clock is ticking:  The current $14.294 trillion cap on the debt will need to be raised by early August at the latest.

According to the most recent public figures, the debt was just $14 billion shy of the cap.

Republicans in Congress don’t want to raise the amount that the nation can borrow unless they can tie such bigger borrowing to other drastic budget cuts.

So in other words, we’re getting dreadfully close to maxing out our nations credit card, which looks very bad to our creditors, and kills our credit score.  The best answer, it seems to me, would be to start paying down our nations debt.  But a much easier answer (and to some, a better answer) is to simply raise the limit on our nation’s credit card so that it doesn’t look like we’re about to max it out.  Is this really the best way to fix this problem?  The catch 22 of it is that there is no way to pay down this debt in the short run, or quickly.  Congress takes forever to do anything.  By the time they quit fighting long enough to  decide how to start paying down some of the debt, we’d be over our limit.

I would love to hear everyone’s feedback and suggestions on how we can get out of this mess.  Please enter them below.

Summary

Until just a few years ago, Egypt’s ruling military elite was able to “borrow” money from Egyptian banks with no intention of paying it back. President Hosni Mubarak’s son Gamal changed all that, reforming and privatizing the system in order to build an empire for himself. For the first time in centuries, Egypt’s financial position was not entirely dependent upon outside forces. Now, Mubarak and his reform-minded son are out of the picture and Egypt has a budget deficit and a government debt load that are teetering on the edge of sustainability.

Analysis

Foreign Minister Ahmed Abul Gheit called on the international community Feb. 15 to help speed Egypt’s economic recovery. Such foreign assistance will certainly be essential, but only in part because of the economic disruptions caused by the recent protests. Even more important, the political machinations that led to the protests indicate Egypt’s economic structure is about to revert to a dependence upon outside assistance.

Egypt is one of the most undynamic economies of the world. The Nile River Delta is not navigable at all, and it is crisscrossed by omnipresent irrigation canals in order to make the desert bloom. This imposes massive infrastructure costs upon Egyptian society at the same time as it robs it of the ability to float goods cheaply from place to place. This mix of high capital demands and low capital generation has made Egypt one of the poorest places in the world in per capita terms. There just has not been money available to fund development.

As a result, Egypt lacks a meaningful industrial base and is a major importer of consumer goods, machinery, vehicles, wood products (there are no trees in the desert) and foodstuffs (Egypt imports roughly half of its grain needs). Egypt’s only exports are a moderate amount of natural gas and fertilizer, a bit of oil, cotton products and some basic metals.

The bottom line is that even in the best of times Egypt faces severe financial constraints — its budget deficit is normally in the range of 7 to 9 percent of gross domestic product (GDP) — and with the recent political instability, these financial pressures are rising.

The protests have presented Egypt with a cash-crunch problem. At $13 billion in annual revenues, tourism is the country’s most important income stream. The recent protests shut down tourism completely — at the height of the tourist season, no less. The Egyptian government estimates the losses to date at about $1.5 billion. Military rule, tentatively expected to last for the next six months, is going to crimp tourism income for the foreseeable future. Simultaneously, the government wants to put together a stimulus package to get things moving again. Details are almost nonexistent at present, but a good rule of thumb for stimulus is that it must be at least 1 percent of GDP — a bill of about $2 billion. So assuming that everything goes back to normal immediately — which is unlikely — the government would have to come up with $3.5 billion from somewhere.

Which brings us to financing the deficit, and here we get into some of the political intrigue that toppled former Egyptian President Hosni Mubarak.

One cannot simply walk out of Egypt, so since the time of the pharaohs the Egyptian leadership has commanded a captive labor pool. This phenomenon meant more than simply having access to very cheap labor (free in ancient times); it also meant having access to captive money. Just as the pharaohs exploited the population to build the pyramids, the modern-day elite — the military leadership — exploited the population’s deposits in the banking system. This military elite — or, more accurately, the firms it controlled — took out loans from the country’s banks without any intention of paying them back. This practice enervated the banks in particular and the broader economy in general and contributed to Egypt’s chronic capital shortage. It also forced the government to turn to external sources of financing to operate, in particular the U.S. government, which was happy to play the role of funds provider during the final decade of the Cold War. There were many results, with high inflation, volatile living standards and overall exposure to international financial whims and moods being among the more disruptive.

Over the past 20 years, three things have changed this environment. First, as a reward for Egypt’s participation in the first Gulf War, the United States arranged for the forgiveness of much of Egypt’s outstanding foreign debt. Second, with the Cold War over, the United States steadily dialed back its economic assistance to Egypt. Since its height in 1980, U.S. economic assistance has dwindled by over 80 percent in real terms to under a half-billion dollars annually, forcing Cairo to find other ways to cover the difference (although Egypt is still the second-largest recipient of American military aid). But the final — and most decisive factor — was internal.

Mubarak’s son Gamal sought to change the way Egypt did business in order to build his own corporate empire. One of the many changes he made was empowering the central bank to actually enforce underwriting standards at the banks. The effort began in 2004, and early estimates indicated that as many as one in four outstanding loans had no chance of repayment. By 2010 the system was largely reformed and privatized, and the military elite’s ability to tap the banks for “loans” had largely disappeared. The government was then able to step into that gap and tap the banks’ available capital to fund its budget deficit. In fact, it is this arrangement that allowed Egypt to weather the recent global financial crisis as well as it did. For the first time in centuries, Egypt’s financial position was not entirely dependent upon outside forces. The government’s total debt load remains uncomfortably high at 72 percent of GDP, but its foreign debt load is only 11 percent of GDP. The economy was hardly thriving, but economically, Egypt was certainly a more settled place. For example, Egypt now has a mortgage market, which did not exist a decade ago.

From Gamal Mubarak’s point of view, four problems had been solved. The government had more stable financing capacity, the old military guard had been weakened, the banks were in better shape, and he was able to build his own corporate empire on the redirected financial flows in the process. But these changes and others like them earned the Mubarak family the military’s ire. Mubarak and his reform-minded son are out of the picture now, and the reform effort with them. With the constitution suspended, the parliament dissolved and military rule the order of the day, it stretches the mind to think that the central bank will be the singular institution that will retain any meaningful policy autonomy. If the generals take the banks back for themselves, Egypt will have no choice but to seek international funds to cover its budget shortfalls. Incidentally, we do not find it surprising that now — five days after the protests ended — the banks are still closed by order of the military government.

Yet Egypt cannot simply tap international debt markets like a normal country. While its foreign debt load is small, its total debt levels are very similar to states that have faced default and/or bailout problems in the past. An 8-percent-of-GDP budget deficit and a 72-percent-of-GDP government debt load are teetering on the edge of what is sustainable. As a point of comparison, Argentina defaulted in 2001 with a 60-percent-of-GDP debt load, and it had far more robust income streams. Even if Egypt can find some interested foreign investors, the cost of borrowing will be prohibitively high, and the amounts needed are daunting. Plainly stated, Cairo needed to come up with $16 billion annually just to break even before the crisis and the likely banking changes that will come along with it. 

Until just a few years ago, Egypt’s ruling military elite was able to “borrow” money from Egyptian banks with no intention of paying it back. President Hosni Mubarak’s son Gamal changed all that, reforming and privatizing the system in order to build an empire for himself. For the first time in centuries, Egypt’s financial position was not entirely dependent upon outside forces. Now, Mubarak and his reform-minded son are out of the picture and Egypt has a budget deficit and a government debt load that are teetering on the edge of sustainability.

Analysis

Foreign Minister Ahmed Abul Gheit called on the international community Feb. 15 to help speed Egypt’s economic recovery. Such foreign assistance will certainly be essential, but only in part because of the economic disruptions caused by the recent protests. Even more important, the political machinations that led to the protests indicate Egypt’s economic structure is about to revert to a dependence upon outside assistance.

Egypt is one of the most undynamic economies of the world. The Nile River Delta is not navigable at all, and it is crisscrossed by omnipresent irrigation canals in order to make the desert bloom. This imposes massive infrastructure costs upon Egyptian society at the same time as it robs it of the ability to float goods cheaply from place to place. This mix of high capital demands and low capital generation has made Egypt one of the poorest places in the world in per capita terms. There just has not been money available to fund development.

As a result, Egypt lacks a meaningful industrial base and is a major importer of consumer goods, machinery, vehicles, wood products (there are no trees in the desert) and foodstuffs (Egypt imports roughly half of its grain needs). Egypt’s only exports are a moderate amount of natural gas and fertilizer, a bit of oil, cotton products and some basic metals.

The bottom line is that even in the best of times Egypt faces severe financial constraints — its budget deficit is normally in the range of 7 to 9 percent of gross domestic product (GDP) — and with the recent political instability, these financial pressures are rising.

The protests have presented Egypt with a cash-crunch problem. At $13 billion in annual revenues, tourism is the country’s most important income stream. The recent protests shut down tourism completely — at the height of the tourist season, no less. The Egyptian government estimates the losses to date at about $1.5 billion. Military rule, tentatively expected to last for the next six months, is going to crimp tourism income for the foreseeable future. Simultaneously, the government wants to put together a stimulus package to get things moving again. Details are almost nonexistent at present, but a good rule of thumb for stimulus is that it must be at least 1 percent of GDP — a bill of about $2 billion. So assuming that everything goes back to normal immediately — which is unlikely — the government would have to come up with $3.5 billion from somewhere.

Which brings us to financing the deficit, and here we get into some of the political intrigue that toppled former Egyptian President Hosni Mubarak.

One cannot simply walk out of Egypt, so since the time of the pharaohs the Egyptian leadership has commanded a captive labor pool. This phenomenon meant more than simply having access to very cheap labor (free in ancient times); it also meant having access to captive money. Just as the pharaohs exploited the population to build the pyramids, the modern-day elite — the military leadership — exploited the population’s deposits in the banking system. This military elite — or, more accurately, the firms it controlled — took out loans from the country’s banks without any intention of paying them back. This practice enervated the banks in particular and the broader economy in general and contributed to Egypt’s chronic capital shortage. It also forced the government to turn to external sources of financing to operate, in particular the U.S. government, which was happy to play the role of funds provider during the final decade of the Cold War. There were many results, with high inflation, volatile living standards and overall exposure to international financial whims and moods being among the more disruptive.

Over the past 20 years, three things have changed this environment. First, as a reward for Egypt’s participation in the first Gulf War, the United States arranged for the forgiveness of much of Egypt’s outstanding foreign debt. Second, with the Cold War over, the United States steadily dialed back its economic assistance to Egypt. Since its height in 1980, U.S. economic assistance has dwindled by over 80 percent in real terms to under a half-billion dollars annually, forcing Cairo to find other ways to cover the difference (although Egypt is still the second-largest recipient of American military aid). But the final — and most decisive factor — was internal.

Mubarak’s son Gamal sought to change the way Egypt did business in order to build his own corporate empire. One of the many changes he made was empowering the central bank to actually enforce underwriting standards at the banks. The effort began in 2004, and early estimates indicated that as many as one in four outstanding loans had no chance of repayment. By 2010 the system was largely reformed and privatized, and the military elite’s ability to tap the banks for “loans” had largely disappeared. The government was then able to step into that gap and tap the banks’ available capital to fund its budget deficit. In fact, it is this arrangement that allowed Egypt to weather the recent global financial crisis as well as it did. For the first time in centuries, Egypt’s financial position was not entirely dependent upon outside forces. The government’s total debt load remains uncomfortably high at 72 percent of GDP, but its foreign debt load is only 11 percent of GDP. The economy was hardly thriving, but economically, Egypt was certainly a more settled place. For example, Egypt now has a mortgage market, which did not exist a decade ago.

From Gamal Mubarak’s point of view, four problems had been solved. The government had more stable financing capacity, the old military guard had been weakened, the banks were in better shape, and he was able to build his own corporate empire on the redirected financial flows in the process. But these changes and others like them earned the Mubarak family the military’s ire. Mubarak and his reform-minded son are out of the picture now, and the reform effort with them. With the constitution suspended, the parliament dissolved and military rule the order of the day, it stretches the mind to think that the central bank will be the singular institution that will retain any meaningful policy autonomy. If the generals take the banks back for themselves, Egypt will have no choice but to seek international funds to cover its budget shortfalls. Incidentally, we do not find it surprising that now — five days after the protests ended — the banks are still closed by order of the military government.

Yet Egypt cannot simply tap international debt markets like a normal country. While its foreign debt load is small, its total debt levels are very similar to states that have faced default and/or bailout problems in the past. An 8-percent-of-GDP budget deficit and a 72-percent-of-GDP government debt load are teetering on the edge of what is sustainable. As a point of comparison, Argentina defaulted in 2001 with a 60-percent-of-GDP debt load, and it had far more robust income streams. Even if Egypt can find some interested foreign investors, the cost of borrowing will be prohibitively high, and the amounts needed are daunting. Plainly stated, Cairo needed to come up with $16 billion annually just to break even before the crisis and the likely banking changes that will come along with it.