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Got It.

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Think about it. During normal catastrophes, central bank and government funds are sufficient to replace missing core capital on the balance sheets of otherwise insolvent banks, businesses, councils, states, individuals, etc.

The losses are so large in the US now that they can’t possibly so this – they’re missing $1.8 trillion according to Roubini.

So what do you do? Do you print $1.8 trillion – no! of course not – that would collapse the dollar.

Do you let the debt deflate? No! The Americans would never accept two lost decades of debt deflation like Japan did.

Third option. You’re the US government, right? You have the world’s reserve currency and you’re triple-A rated, right? Credit worthiness isn’t a problem for now, right?

So – you’re core capital guarantees hold good on the international markets. Now all you need is a way of turning your guarantees (TARP, TALF, etc.) into enough money to cover total losses.

Answer: You leverage up, using the commercial banks to do it. E.g. the JP Morgan Chase bailout of California. The state guarantee is implicit – they’d go into Federal receivership if their debt situation was untenable. But in the mean time – just borrow $1.5bn from a commercial bank who assume the state and ultimately the government are good for the losses.

You’re basically marshalling the banking system to leverage up to 10:1 on government guaranteed money, like they would on retail savings, yes?

Result: A government ponzi scheme to bail out the commercial bank / private credit ponzi scheme with the only difference being the government has an implicit “default not possible†status.

Until the next disaster, of course.

Edited by AvidFan

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