2Bit_Strategy

Guys -

Is there knowledgeble commentary out there on whether the bailout is good? I feel like I the risk averse am footing the bill for the crazy risk takers...so while the going is good they buy islands and when the going is bad they get bailed out..In the meantime they still have the island whereas I am paying mortgage on a house which is now much below where I bought it...

maybe I am all wrong. dunno.

any good places where people more knowledgeble than I are debating the issue.

Danke.

Simit Patel

the bailouts and money injections will ultimately result in an expansion of the money supply, which results in a devaluation of the US dollar, and a rise in inflation (i.e. stuff costs more). as the recipients of the bailout get the extra cash that was created via the expansion of the money supply, what is essentially happening is that prices will rise for everyone, but the recipients of the bailout have extra money that was created.

as there was no bailout for you and me (aside from a small rebate check that was issued to some american taxpayers, which could be viewed as a bailout of sorts), the essential result is that you and i pay higher prices. so, this type of inflation is really a transfer of wealth.

the bailout issue is far from resolved, particularly the fannie and freddie one, so the government may decide to raise taxes directly as a way of getting the capital to continue financing the bailouts -- though i would expect a combination, or certainly a greater reliance on expansion of the money supply.

so really, there are two ways you can pay for it:

1. direct taxation
2. expansion of the money supply, which will result in a devalued currency and higher prices

here are some links that you may find useful:

A wider U.S. financial bailout could fuel inflation - International Herald Tribune
Inflation will follow Freddie Mac and Fannie Mae bail out « Peter J. Cooper’s Weblog
Government Bailouts Mean More Inflation and Worthless Dollar

i also blogged previously about it here, and noted what i thought would be implications for traders.

viriox

I don't intend to make this a political thread but who is to stand the profit from the bailout? Private banking institutions behind the federal reserve bank who will eventually nibble away the bailed out companies? Is the federal intervention big enough that would result in a flourishing Forex and currency market because of increase in money (dollar) supply?

2Bit_Strategy

Thanks Simit. That was helpful. It makes me abosolutely furious..this whole mess. I think the retail investor suffers either which way.

Simit Patel

there is consolidation going on in the banking industry, so i think this will end up benefiting the large banks that will be able to capitalize on the failure of smaller banks. the companies receiving the bailouts also stand to benefit, though i know there are some intricacies there so i'm not entirely sure of who benefits there.

i do think the money supply expansion is going to enable profit opportunities for those who short the US dollar. the key question is to short the US dollar against what? foreign currencies is one option, and the past eight years have been good to those who have ridden the short USD trend, particularly against EUR and GBP. it is worth noting, however, that those economies have money supply issues as well. while i don't think their monetary issues are as bad as the US', that eight year trend may not be as stable in times to come.

austrian economists, who tend to be most skeptical of the legitimacy of bailouts and most concerned about currency devaluation/price inflation, always recommend precious metals and commodities. we have seen precious metals, particularly gold, rise significantly over the past eight years, and this week as well.

i favor currencies because that is what i know, although i recently got into gold and silver positions. i probably won't trade them, but will view them more like investments -- things to hold in the event of serious dollar devaluation. though ultimately, i think we're in quite volatile and revolutionary times, and i prefer to trade things on a short-term basis based on technicals.

just my $.02 of course.