Tuesday, September 9, 2008

After bailout...

As we all know, Fannie Mae and Freddie Mac were being nationalised a couple of days ago. The US government has put in $US1 billion of new capital (in the form of preferred shares) and says it might put in up to $US200 billion more. At the same time, it will take over the management of these two companies. Consequently, the stock market all over the world cheered this news in exuberance.

This is a farce.

There is a cost to this nationalization, which as we said two months ago in How do we all pay for the bailout of Fannie Mae and Freddie Mac?,

“The collapse of Freddie Mac and Fannie Mae will result in a colossal deflation. Can the US allow such an unthinkable to happen? If the answer is no, then inflation is the only path out of it, in which the road to hyperinflation hell begins. This is also unthinkable. Which road will the US take? If the US takes the latter route, all of us will be paying for their bailout via inflation.”

Now consider the situation of the US government budget as reported in ‘Frannie’ bailout heavy with irony:

“ According to the US Government’s Accountability Office the national debt stood at $US4.4 trillion early this year. Unless the habit of deficit spending is arrested quickly this figure will double in the next ten years. Meanwhile, the social security system faces an unfunded liability estimated by the Government Accountability Office at $US6.7 trillion and the unfunded liability of Medicare is $US34 trillion.”

If the US government has to bail out more and more blow-ups in the financial system, there is only one way the level of national debt can go: up and up to the sky. It has come to a stage that the word “billion” is not enough to describe the magnitude of the debt- “trillion” has used instead. That level of debt is approximately $150,000 for every man, woman and children in the United States.

Is the US government going to pay all these debt by raising taxes? With rising unemployment, record levels of private debt and wobbly economy, do you think this idea can ever be entertained? If it is politically impossible to raise taxes, what else can be done? Default or print money?

Strangely, the market reacted to this news by bidding up the US dollar

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