How Inflationary Is The $750 Billion Bailout Going To Be?

[Sinking Feeling]

Added to the the $620 billion that entered markets on Monday, what are the overall effects of this going to be on:

a) the US general economy

the global economy

Is the US treasury really going to be able to sell the bonds abroad to pay for this and does it really make a difference anyway. I would imagine a repatriated dollar would have much the same effect as one which is monetised by the Federal Reserve.

Edited October 4, 2008 by Sinking Feeling

[carseller]

Added to the the $620 billion that entered markets on Monday, what are the overall effects of this going to be on:

a) the US general economy

the global economy

Is the US treasury really going to be able to sell the bonds abroad to pay for this and does it really make a difference anyway. I would imagine a repatriated dollar would have much the same effect as one which is monetised by the Federal Reserve.

It's going to be deflationary.

[Guest Shedfish]

i switched on the radio this morning, to BBC world service, and the half-sentence i caught was about an economist who had refused to be interviewed because he/she was too confused.

i feel the same, if a little less well informed... however my sig should confirm my gut feeling

[covant]

It's going to be deflationary.

Can you give your reasoning. As I understand it. Printing of $$$ is inflationary for USA, so printing of lots of money is very inflationary.

Still I can see s short period of less inflation while US economy is in it's confused situation and hence spending is held back.

[REP013]

Can you give your reasoning. As I understand it. Printing of $$$ is inflationary for USA, so printing of lots of money is very inflationary.

Still I can see s short period of less inflation while US economy is in it's confused situation and hence spending is held back.

(1-1)+1 = 1?

[BearNecessities]

Can you give your reasoning. As I understand it. Printing of $$$ is inflationary for USA, so printing of lots of money is very inflationary.

Still I can see s short period of less inflation while US economy is in it's confused situation and hence spending is held back.

I can't answer for the respondant, but perhaps he means that the overall situation is so deflationery that these measures are like pi$$ing in the wind.

Lets not forget that even if banks were leveraging properly, every $1 lost would mean $10 not lent. Assuming losses come to $1trillion (on the very conservative side), then $10 trillion* exits the economy. That doesn't even allow for the leverage unwind that will surely happen as the remaining players in the banking industry become and stay for sometime, highly risk-averse.

* Credit - not real money

Edited October 4, 2008 by BearNecessities

[STRLondon]

Can you give your reasoning. As I understand it. Printing of $$$ is inflationary for USA, so printing of lots of money is very inflationary.

Still I can see s short period of less inflation while US economy is in it's confused situation and hence spending is held back.

Money needs to be pumped into the system so that loans can be unwound in a timely fashion without collapsing the system. I cant believe that the US govenment is trying to hyperinflate their way out of it, they must know this will all end in tears.

However, a term we keep using on this forum is crashioning.

For example, they may have inflated by 1 extra dollar but the monetary system may contract by 2 or more dollars, so in effect, you can have inflation and deflation going on at the same time yet one will probably run away from the other.

edit : spelling

Edited October 4, 2008 by STRLondon

[mightytharg]

American taxpayers couldn't afford their home payments on Thursday.

Today each they owe £6,000 more (plus interest).

How could this help in any way?

[Injin]

(1-1)+1 = 1?

Credit still isn't money.

It's lies.

[Sinking Feeling]

I'm not sure that I understand the reasoning that talks about deflation from this situation. Let's look at this from the perspective of an asset that we understand - house prices.

Say for example I bought a two bed luxury apartment in central Manchester last year from Inside Track at a very good price - £350,000, and they even threw in the IKEA furniture and the poster of the tennis player scratching her ****. Now this year similar places are on the market for £150,000. Now I might say that I have 'lost £200,000'. In fact no one has actually lost anything, the money has simply been transferred from my account into the account of shysters - the total amount of money in the economy remains the same. Now no one will will buy this property because it was constructed with the poorest materials by a group of eastern european pig farmers, so I complain to the government that no one in their right mind wants to buy it, and I'm not sure what it's really worth (a lie). Anyway the government says, "well I tell you what son, we'll take this sack of turds off your hands at the full market price - £350,000", we'll borrow some money to do this and saddle the tax payer with the debt".

Now depending on where the government 'borrows' from (who buys the bonds) makes a difference, but more than likely, a significant percentage will be either new money or repatriated money - both increase the total money supply and in turn the cost of things in general.

[BearNecessities]

so I complain to the government that no one in their right mind wants to buy it, and I'm not sure what it's really worth (a lie). Anyway the government says, "well I tell you what son, we'll take this sack of turds off your hands at the full market price - £350,000", we'll borrow some money to do this and saddle the tax payer with the debt".

Difference is the US bailout is buying the bad debts from the financial institutions not bailing out the homeowner. If it was the latter (as some Republicans wanted) massive inflation would follow as it would be money to the economy like drug to a vein

[Sinking Feeling]

Difference is the US bailout is buying the bad debts from the financial institutions not bailing out the homeowner. If it was the latter (as some Republicans wanted) massive inflation would follow as it would be money to the economy like drug to a vein

Massive inflation could still follow depending on what happens to the money. If it is locked away in bank vaults (metaphorically speaking), then there would be no effect, but if even one tenth gets into the economy it could have some effect (possibly another 1% or so on inflation).

[Daft Boy]

American taxpayers couldn't afford their home payments on Thursday.

Today each they owe £6,000 more (plus interest).

How could this help in any way?

Thats easy. They can do what people in the UK have been doing for years. Consolidate the loans against the house and spread the payments.

[frozen_out]

Personally I just wish folks would stop using the word 'hyperinflate'

The US are not trying to 'hyperinflate' their way out of anything. Even is this bailout leads to inflation of 25% a year, that IS NOT hyperinflation. 50% a year? still NOT hyperinflation. Just high inflation.

I would guess the size of the bailout is supposed to be pretty much neutral. Deflation is baked into the cake. It's inevitable because the credit is not backed by the production to turn it into money. This guarantees that incredible amounts of debt must be wiped, massively deflationary. The $700 bn IMO is just an attempt to manage that deflation in an orderly manner and have many, many years of slow growth and lower than average inflation rather than a couple of years of massive, devastating deflation.

Edited October 4, 2008 by frozen_out

[Mikhail Liebenstein]

It's going to be deflationary.

I agree that it will also be deflationary and therefore strengthen the Dollar. This may sound perverse, but actually what is happening is that distressed asset are being "bought" by the Government at knock down rates. This firstly lowers the valuation of the assets, but secondly forces the banks to take an immediate hit on their balance sheets.

The point of the bailout is not so much to prop up the banks or inflate the system, but to reduce uncertainty about which will stand and which will fall.

Essentially the bad banks are going to be the ones offloading by the truckload, this will make their lending sheets smaller and then easier to take over.

[lufc]

Added to the the $620 billion that entered markets on Monday, what are the overall effects of this going to be on:

a) the US general economy

the global economy

Is the US treasury really going to be able to sell the bonds abroad to pay for this and does it really make a difference anyway. I would imagine a repatriated dollar would have much the same effect as one which is monetised by the Federal Reserve.

I think the recent bailout money (and IMHO don't think it's nearly enough) will just set the playing field straight again, in other words it's enough to prevent a complete banking failure but not enough to create another massive lending boom, yet.

No doubt the bankrupt West's creditors might have a different opinion.

The big question now is what are the Western central banks future intentions, proper regulation and restraint or to try and set the whole debt bonanza rolling again with supposedly China and the likes picking up the tab.

All that really has happened is the distrust that existed between the commercial banks has been placed on the books of the central banks.

Whatever happens I think the days of globalization are over and we're at the dawn of a new era of protectionism.

[Griptool]

My understanding of the bailout is - Some American taxpayers are defaulting on their debt commitments - the foreign debt holders have had enough of being stiffed, therefore have forced the US gubmint make good on the debt and then pass the burden back to the taxpayer through the TARP.

The USA (and the UK to a lesser extent) are completely reliant on the willingness of the exporting nations to continue funding the massive deficits. Any hint of hyperinflation will crash the Dollar quicker than Gary Glitter volunteering for the school run.

[REP013]

Credit still isn't money.

It's lies.

And your point is?

I have a piece of paper with 100 written on it that can buy me 100.

I have credit that gives me another 100 pieces of paper that have 100 written on it, that will buy me 100 * 100.

The money is just being recycled.

On the balance sheets it's already lent and spent, they are just taking it back from those that spent it to give to those who lent it to balance their books.

I see no inflation, I'm not even sure that I see deflation anymore, some talk of biflation / stagflation, I now think these as closer to the mark?

[A.steve]

Can you give your reasoning. As I understand it. Printing of $$$ is inflationary for USA, so printing of lots of money is very inflationary.

Still I can see s short period of less inflation while US economy is in it's confused situation and hence spending is held back.

I can't speak for carseller, but I share his view.

$700bn is not being spent, so much as being swapped for assets that were, until recently, changing hands between banks in exchange for sums likely to have been significantly in excess of $700bn. Right now we're in the strange situation where the vast majority of what was considered to be money in 2007 is not accepted as such... the bale-out will ensure that $700bn of that is trusted... but there are problems. One major problem is that we still don't know which or whose $700bn will be made-reliable, or the asset-oriented cost that will be associated with this. Another major problem is that the bale-out lacks transparency to such an extent that many will not trust its efficacy - and, finally, the matter is such a political hot potato, anyone taking charge would need to err on the side of caution when it comes to inflationary effects - hence, I expect (hope) the plan will be conservative in operational matters... because to do otherwise would cause an unacceptable and career-limiting stink.

The bale out will be inflationary if it is used to buy assets at above a 'sensible' value... though, for obvious reasons, establishing what this 'sensible' value should be is no simple matter. I understand the market fundamentalist view (i.e. that the market price is the only value) but I find this somewhat extreme. If a security generates, say, 10% yield - then there is no reason to assume that it is worth less than a share in an equally risky company that yields similar returns. If, for example, I could commit to buying a desirable asset next year, its value this year should be assured (if discounted by an appropriate notional rate of interest) - even if, this year, I can't afford to buy the asset.

I am of the opinion that, if administered honestly, the $700bn bale-out is deflationary - as is the Special Liquidity Scheme (of currently unknown scale) in the UK. In order for the direct effect to be deflationary, all that is required is that the scheme never over-pays for assets... which, given that we're in a credit crunch, shouldn't be all-that hard. With respect to house prices, of course, this specific-asset inflation is critical. The inherent problems with the structure of the mortgage markets has not been resolved - and lenders should be critically aware that returning to this market will likely remain extremely risky for many years to come. In the UK, given the spectacular dominance of the retail residential assets, any downturn in the mortgage market is likely to have a significant impact on the wider economy. The housing pyramid scheme was an extremely effective way to get people to spend - typically spend money that they haven't earned - and now that is over. The implications for retail will be enormous - and the consequences for the economy huge... I've seen no plausible strategy mooted to get so many people to spend so much again for the foreseeable future.