Where is Paulson going to get $700 billion for his bail-out plan from?

September 28th, 2008

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There’s news of a (yet another) tentative deal for Henry Paulson’s US$700 billion bailout Plan. There is a lot of public discontent and anger over the plan. After all, why should Main Street pay for Wall Street’s stupidity and greed? What about the millions of dollars of ‘golden parachutes’ for executives? The idea of the Plan sounds good in principle, but there are a lot of unanswered questions.

First, as Congressman Ron Paul grilled Ben Bernanke, if the free market has no idea how much these dodgy assets are worth, then how on earth can the Treasury and the Fed work out their value? Ben Bernanke gave a very unconvincing answer. As we explained in How much to pay for toxic debt?, if the government is too stingy in the price it pays (so as to act in the interests of tax-payers), then the Plan will become completely pointless. It’s an either all or never situation. Half-baked measures are worse then no measures.

This leads to another question. Even if it’s possible for the authorities to work out how much these toxic stuffs are worth in due time, where on earth did they come up with the figure of $700 billion? As this article reported,

“It’s not based on any particular data point,” a Treasury spokeswoman told Forbes.com Tuesday. “We just wanted to choose a really large number.”

In other words, that figure was just a ‘large’ number plucked from the sky.

Next, is that ‘large’ figure, $700 billion enough? We are doubtful. Total private debt in the US is a cool $41 trillion and that does not include the many trillions of dollars of public debt. Estimates of the US public debt that includes the unfunded medicare and social security liabilities ranges between $40 to $55 trillion (see How is the US going to repay its national debt?). Therefore, $700 billion is really chicken feed. Marc Faber estimated that $5 trillion is a more realistic figure.

Then, the next question to ask is this: where on earth is the money going to come from? If the US government issues new government debt, this will increase the debt-servicing burden of the US government, which in turn means that the tax burden of the American people will have to increase. But after listening to yesterday’s McCain-Obama debate, we couldn’t believe our ears when both of them were talking about tax cuts! With a national debt so astronomically high, nationalisations, bailouts and the Plan will increase it even further. How on earth could these two presidential hopefuls talk about cutting tax?

Regardless of the wrangling due to the Plan, this fundamental fact remains: the entire nation has no means to pay for its public and private debt. It’s either debt default or crushing tax for their current and future generations. If both outcomes are out of the question, then there’s only one way left. As we said before in Bush?s mortgage relief plan- who pays? back in December last year,

Bush could tax the American people to pay for his plan. But this will be politically impossible because in a democracy, the mob always want something for nothing. The next best alternative will be through stealth tax- ?printing? of money (see How to secretly rob the people with monetary inflation?). This way, the American people will pay through price inflation. That is, they will pay through the further loss of their dollar?s purchasing power.

Do you think the US will eventually resort to the monetary printing press?

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