Why the Bailout Won’t Work

By Andrew Gordon

The economy is now staring eyeball-to-eyeball with an activist U.S. government. It will legislate, reform, supervise, bully, give out money like cotton candy and get concessions in return.

It will encourage technological development in environmental and other “future” industries. It will seek sources of energy other than the oil and gas we get from Mexico, Canada and OPEC. And it will put generous sums of money behind these initiatives.

The Obama government emphatically does not want banks to sit on the money they get from the government. Nor do they want it to go to shareholders in the form of dividend payments. This is why I look for more companies to cut their dividends and this plays perfectly into my Red Flag Insider strategy.

But wanting it and getting it are two different things. The financial crisis has spread to other countries, undermining economic growth everywhere and putting a dent into foreign exchange reserves. All the while, the printing presses of the world are working overtime.
The draining of money from the global economy combined with the wanton printing of money has turned into a high-stakes battle.

The crisis continues unabated. The money drain is winning so far.  And here are four reasons why it’ll keep on winning...

1. Consumer, construction and commercial real estate loans are getting worse.
2. The U.S. economic crisis has turned into a global crisis. And now the global dimensions of the crisis is boomeranging back on the U.S. economy and aggravating our problems even further.
3. Some overseas economies have been hit hard. But many developing countries have not yet felt the full brunt of the global crisis. They will this year, making the crisis truly global.
4. The negative feedback cycle, as Warren Buffet calls it, is still playing out. Consumers have lost faith in the economy, buying less. Companies are laying off and cutting back, expecting consumers to buy less. And banks are increasingly fearful, lending less to both individuals and businesses.

This is worth watching. With so many sectors suffering, the ones that get government sustenance are operating at a competitive advantage.

Fair or not, it gives you a way to invest.

Editor's Note:

Recently I have heard several people suggest that a possible solution to the deflationary pressures so eloquently described by Andrew Gordon above is to simply give each adult citizen a million dollars. 

Since there about 150 million adult citizens that would result in an influx of $150 Trillion dollars.  Most of these citizens would promptly pay off their debts such as mortgages which would reliquify the banks and wipe out the bad debts off their books.

As I've said before the purpose of a recession (or depression) is to wipe out bad debts and get the economy back on a solid footing.  (It also has a side benefit of wiping out the weak players and only letting the strong survive.) 

So this scheme would serve the first purpose if not the second.  It seems the Government is determined to avoid the consequences of stupidity and bail out both the good and the bad anyway, so this wouldn't be any worse.

Unfortunately, at this point the bank bailout has not wiped out any of the bad debt and has only served to line the pockets of the well connected.

At least the million dollar give away would wipe out the bad debts and would be equitable.

It would also be highly inflationary because it would inflate the money supply so massively. 

 According to Andy Gordon in The Inflation Beast Is About to be Let Out

"Global stock markets have lost roughly $32 trillion of market value since they peaked in October 2007."

So $150 Trillion is about five times the amount needed to replace that.  But what if we could eliminate debt and return liquidity levels to 2007 levels? 

Somewhere between $30 -$50 Trillion should do the job nicely, so what if the Government gave each citizen somewhere between $200,000 and $300,000? 

Now of course that begs the question "Where would they get the money?"  But if the purpose of this exercise is simply to wipe out debt in a neat organized way, what we have done is transfer all these smaller debts into one big large debt which the FED can "monetize" (read write off) with the stroke of a pen.  Of course the risk is that the cash we are currently holding will become worthless as massive inflation takes hold. But at least everyone would have less debt staring them in the face. 

All-in-all,  not a bad prospect for most Americans who are struggling under mountains of oppressive debt.

In a way this scheme reminds me of the Biblical "jubilee".  In the Old Testament Moses was commanded to hold a jubilee every 50 years.  Jubilee would free all the slaves and wipe out all the debt so everyone was free to start over with a clean slate.

It seems one way or another, that the economy needs refreshing about every 50 years (either through a painful depression which forces creditors to write of bad debts or a celebratory Jubilee).  Perhaps God knew what he was talking about when He gave Moses that commandment!

Interestingly, Israel never held a Jubilee even though it was part of the Law.  Perhaps it is time for a modern version. 

Tim McMahon, Editor
InflationData.com