no third solution

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Category Archives: Economics Lessons

How Much Will the Bailout Cost You?

September 21st, 2008

FT is reporting that the cost of the bailout will be upwards of $700 Billion. That’s a lot of lettuce.

Assuming 150M taxpayers in the U.S., that works out to about $5,000 per person. That’s the right now cost. If it had to be paid for right now, it couldn’t be done. Unfortunately, the government isn’t going to pay for it right now, they’re going to finance it, putting up your productivity and acquiescence as collateral.

Those $5,000 will be compounded by invisible inflation that will mysteriously be “adjusted” away in the officially reported core inflation Index du jour, and a crushing tax burden sure to follow.

President Bush said the administration was faced with preventing the collapse of a financial “house of cards”. “People are beginning to doubt our system, people were losing confidence and I understand it’s important to have confidence in our financial system.” he said.

He said the risk of doing nothing far outweighed the risk of the package. He assured taxpayers that over time they would get a lot of their money back.

Really? We’ll get back “a lot of” our money?

Not, “all of” it? Not, “all of it, plus interest, thanks for your patience” ?

Nope, it’s sure[1] to yield “a lot of” the original principle. Which means that, by design it is a net loss proposition. I’m going to go out on a limb here: there’s not a snowball’s chance in hell that this “investment” will yield a positive, inflation-adjusted return for any taxpayer, anywhere, ever.

Taxpayers will never get any of “their money back.”

This isn’t an “investment,” it’s corporate welfare. And every last one of us should be outraged by it.

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1.Not actually “sure”. MayWill lose value.

Toxic Assets

September 19th, 2008

Financial Times reports that Stocks soar on rescue hopes, that a deal is being brokered which would empower the government to manage so-called “toxic” assets. The New York Times calls this the biggest bailout in United States history.

    Q: Why are these assets “toxic” ?

      A: Because they’re illiquid.

    Q: Why are these assets illiquid?

      A: Because nobody wants to buy them.

    Q: Why doesn’t anybody want to buy them?

      A: Because nobody knows what they’re worth.

    Q: What about the shareholders who want to sell?

      A: They must know something we don’t.

There is something fundamentally (and terribly) wrong with any system which forces the whole of its constituency to absorb staggering losses, in the form of bailouts for companies deemed Too Big to Fail.

We didn’t share in their profits when they were making money hand-over-fist, but now, we’re being asked to absorb their losses, and if and when these companies turn a profit in the future, we won’t be invited to share any of that, either.

The Demand for Money

September 9th, 2008

Gilligan says, in response to On The Demand for Money:

I don’t think one flows from the other.

A true free market will not alter the prices of something simply because one individual’s desire for more money.

Unless you were talking about enough people demanding more money, where the shopkeeper notices revenue dropping and is forced to drop the prices of cheeseburgers and grape soda to entice you back, right?

If people want more money, they usually think in terms of working extra hours or lottery payouts rather than dropping their levels of consumption, no?

Did I miss something?

I said, it sounds like Gilligan is mixing his macro and his micro. Of course it doesn’t seem like market will alter the prices of goods and services as a result of one individual’s desire for more (or less) money, nor for more (or fewer) goods or services. However, market prices are essentially determined at the margins, that is, by the marginal buyers and sellers.

Those individuals willing to pay more will bid prices up, and those individuals eager to sell all of their product and take an early afternoon, will keep prices in check.

Gilligan replies,

Maybe our view of demanding more money is distorted because if I demand more money, I can get it, thanks to fiat money/fractional reserve banking ;-)

Now you got it!

Broadly speaking, if the macro “demand” for money has increased, expansionary monetary policy notwithstanding, something has to give. Maybe the workers simply work more, but this means they’re producing more, and so there’s more stuff for sale, and since the demand for “stuff” hasn’t changed, these things can only be sold if they’re offered less expensively. Maybe the workers/owners decide that they can’t profitably sell things less expensively. Under these circumstances, there’s no more work to be had.

The “demand for money” as contemporarily conceived is a macro concept, even though, like the rest of economics, it’s ultimately determined by millions of disparate market participants, on their own atomistic “micro” levels. We simply don’t discuss an individual’s “demand” for money, although it is manifested in his propensity to save or to invest, or to work or to consume. The “demand for money” isn’t a demand for debt slavery.

So my point is, that if you want more money, you generally need to be content with less of something else.

no third solution

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