If you live under a rock, you might be unaware that the US government is looking to purchase $700 billion worth of illiquid assets from financial institutions. Mind you, if you live under a rock, you don't read this blog either.
Last I checked, the US government is already in debt to the tune of 9.7 trillion dollars (plus a few billion).
So when people say that this buyout is being financed by the public purse, that's not exactly true. This buyout is being financed by institutions and foreign governments, through borrowed money, leaving the US taxpayer holding the bag for the outstanding debt. Big difference.
See, if this were available tax money being reinvested in the US economy, maybe some of the arguments in support if this arrangement would make sense.
But, what we have here is the US borrowing money to buy bad debt that will not be repaid. If that concept doesn't make you pause for minute, read that again really slow.
You may ask, what's another $700 billion in debt? After all the US is trillions in debt already. Is another $700 billion really that much?
Yes it is. It increases the net debt by over 7% in one shot. 7% is NOT a small increase. That's the problem with these large numbers, us average plebes have a hard time wrapping our minds around them.
Factor that with idea that in 2006, the Federal Reserve Bank of St. Louis issued a report by Professor Laurence J. Kotlikoff asking, "Is the US Bankrupt?"
In 2006 the answer was, not yet.
No one knows for sure, but there are strong reasons to believe the United States may be going broke. Consider, for starters, Gokhale and Smetters’s (2005) analysis of the country’s fiscal gap,
The Gokhale and Smetters measure of the fiscal gap is a stunning $65.9 trillion! This figure is more than five times U.S. GDP and almost twice the size of national wealth. One way to wrap one’s head around $65.9 trillion is to ask what fiscal adjustments are needed to eliminate this red hole. The answers are terrifying. One solution is an immediate and permanent doubling of personal and corporate income taxes. Another is an imme-diate and permanent two-thirds cut in Social Security and Medicare benefits. A third alterna-tive, were it feasible, would be to immediately and permanently cut all federal discretionary spending by 143 percent.
Take this prescient gem in the report
Determining whether a country is already bankrupt or going bankrupt is a judgment call. In my view, our country has only a small window to address our problems before the financial markets will do it for us.
After reading that report in light of the recent financial market meltdowns and the government reaction to it, I'm going to make a prediction.
We are watching the US go over the cliff of bankruptcy. They already were up shit creek, and even worse they are paddling the wrong way.