The Hungry Writer

An unemployed writer keeping sane during The Depression II.

Really? Wow.

Posted by The eDater on January 27, 2009

Sadly, the best use of dollars in the future will be for fuel.

Sadly, the best use of dollars in the future will be for fuel.

If you’ve followed the business news the past few months, you know that most pundits thought that the various bailouts were, while staggering, not really taking all the problems into account. As individual corporations like Citigroup racked up hundreds of billions in TARP money, it was easy to see where the pundits were coming from.

Well, now we’ve got a new number. $4 trillion. That’s how much the banks are in the hole, apparently. Some ‘head at the link thinks the taxpayer’ll need to pony up $1 trillion to $2 trillion to get us out of this mess – or just under 15% of our GDP. (Not the 5-10% mentioned in the article – the US GDP tops out just south of $14 trillion, not $20 trillion – no idea who’s checking their facts.)

I’ve heard some scary numbers before, including $600 trillion in derivatives exposure, or 10 times World GDP. Of course, that’s if everything ends up worthless, which is unlikely – right? I mean, someone somewhere is still making payments on their mortgage, right?

But, if the $600 trillion figure is correct, only around 2.5% of loans need to go bad to wipe out an amount of wealth equal to the U.S. GDP. Right now, according to some figures, 9% of U.S. mortgages are in default.

What’s all this mean? Hard to say – the $600 trillion figure undoubtedly has debt cut and resold and cut and resold many times over, amplifying each loan. And it also undoubtedly is made to appear worse than it is by the U.S. banks 33-1 ratio – whereby they can loan out $3,300 for every $100 they have (I thought we learned the dangers of margin trading in the Great Depression? Apparently we just learned to rename it and do it bigger.)

Are we approaching an economic reset point? There are certainly plenty who believe that – I don’t claim to be smart enough to know.

I will say that the amount of money being thrown around is starting to sound meaningless, even if we take the ‘small’ $4 trillion figure. If we really print up that kind of cash to absorb bad loans, then the dollar is going to suffer sorely. And if we let that kind of wealth just disappear – it was all make-believe anyway – then the economy will grind to a halt with no new meaningful investment being made.

Things were much simpler with a gold standard. I don’t know that paper money is an inherently evil or flawed form of currency – but I do know, the complexities that arise when you play with imaginary money can get pretty big. It’s quite possible that the human brain just can’t deal with those complexities. They wind up creating situations like, well, just like this one.

I’m glad I don’t have to figure this out. I just need to survive it.


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