Rafe

An Economic Nightmare Before Christmas

These ideas about the coming of uppance are of course very logical. What bothers me it that it seems all this should have happened long ago. Other countries have been funding US debt for a long time. How can anyone predict when they will finally pull out when we still don't fully understand why they haven't done so before?

My take is that the US Federal Reserve has been acting as the Big Bank for the world. Foreign entities deposit (lend) money to the Big Bank, knowing they can redeem their loan (withdraw their deposit) at any time. I'm not sure people (and maybe countries) care exactly what is happening deep inside the bank, as long as its doors are still open and their money appears to be safe at or near face value.

Since there has been no viable alternative global bank available, countries and investors worldwide have been using the US for that purpose. Where, then, will they put their money if the US Big Bank goes out of business? Switzerland?

I'm not claiming this system can go on forever! Obviously it can't. But I don't think a theory that fails to explain why the world is still lending to the U.S. now, can be relied on to predict when there will be a serious (currency-destroying) run on the Big Bank.

Mark-to-Market vs. Mark-to-History

Good idea in principal... but I'm not sure public companies are allowed to issue multiple choice financial statements. That might cause too much ambiguity for investors. For example, which number would be reported for tax purposes? Wouldn't shareholders sue if the shares go up/down while contrary information is in the public record?

Bye, Bye U.S. Dollar?

At the risk of sounding like an idiot after you denounced the idea, I do think the dollar is headed for inflation -- but not, as some people expect, because of anything that has already happened.

Rather, I think the Bush admin will now, with the failure of the bailout package, be forced to quite consciously inflate the currency. They have no other way to get rid of all that bad paper, all the mountains of debt, stretching as far as the eye can see. Congress understandably rejected their stupid "bailout" bill as a gift to the politicians' friends in the world of finance. Since the companies in question are actually insolvent -- not just low on cash -- the only way to help them is to either put money directly into their hands, or else buy them and use pure US government "capital" (ie., cash) to get them out of debt. Buying the bad assets is inflationary, of course, but it won't pass Congress and in any case I don't think it will work. There isn't enough money in the world to buy up all the bad paper out there.

So I predict they will have to buy (nationalize) the failing banks, then create the money to save them out of thin air. The result will be massive inflation, I think.