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Monday, September 22, 2008

$1 Trillion Financial Industry Bailout

There are plans for a $1 trillion Federal government bailout of the financial industry. A lot of those shaky subprime mortgage bonds will be directly purchased by the Federal government. The Federal government will pay a lot more than current market value for these bonds, propping up the price. This will improve the balance sheet of many large banks, so they may continue issuing loans for other purposes. With debt-based money, everyone is dependent on large banks to keep making loans so that the money supply doesn't crash in hyperdeflation.

The bailout won't be paid via a tax hike. It will be paid by increasing the national debt. The cost of the bailout will be paid by inflation.

A $1 trillion bailout will increase the size of the national debt by 10% and the size of the money supply by more than 10%.

Instead of paying $1 trillion to the financial industry, $3000 could be directly given to each American instead. It would have the same overall effect on the economy. The bailout is exactly the same as if $3000 were stolen from every American and given to a handful of financial industry insiders.

When deficit spending is paid by inflation, it's not as outrageous as if it's paid by a tax hike. The overall effect is the same.

Anybody who knew about this bailout ahead of time could have profited immensely. They could have bought the shaky subprime mortgage bonds before the bailout was announced. Now, they can sell those bonds back to the Federal government for a nice profit. As usual, politically connected insiders profit at the expense of everyone else. Only politically connected insiders may do this, because they need to make sure the bonds they bought qualify for the bailout.

Due to a defective monetary system and the Compound Interest Paradox, the Federal government has *NO CHOICE* but to bail out the financial industry. If there were no bailout, then the entire monetary system would unravel as large banks are forced into bankruptcy and they're unable to issue new loans to keep the money supply up.

This is hyped as a "100 year event", but such a bailout was also necessary in the Savings and Loan crisis in the 1980s. The rules of the monetary system guarantee that such a bailout is periodically needed.

The profits of large "too big to fail" banks are guaranteed by the rules of the monetary system. Most of these profits are paid to insiders as salaries and bonuses. An individual cannot get a slice of this subsidy by purchasing shares of financial corporations. Only insiders may loot and pillage, backed by the full power of the State. Even if a non-insider bought a controlling interest in a large bank, a non-insider wouldn't be able to loot and pillage. Most large banks have "poison pill" protections in place, protecting management from a hostile takeover.

The only way to avoid subsidizing financial industry profits is to boycott the Federal Reserve and avoid paying income taxes. If you voluntarily use Federal Reserve Notes as money or voluntarily pay income taxes, then you're a slave.


C. K. Phalon said...

Sounds a bit like Hawala. The Hawala system has worked for a long time.

smokey said...

I don't see how bailouts paid by government borrowing are inflationary.

If the money is borrowed by the government by selling treasuries into the market it decreases the money supply by removing funds that could have been invested or spent on other assets.

Also, if the money only replaces funds lost through deleveraging and liquidation of declining assets it is not inflationary.

This is not to say that the bailouts do not hurt the economy. They redirect funds that could have been spent to support businesses into supporting Wall Street.

CK said...

Being inept, the comment above was supposed to have been connected with the article on agorist messenger systems.
The 1 ( it will actually be closer to 3 ) trillion dollar bailout is not anything like the hawala system.

Anonymous said...

This is a very good article, but it isn't "grown up" enough. This overview assumes that the government and the bankers are really, honestly, trying to save the economy, and have some legitimate goals other than theft. The article shows then that this may come at a great cost.

The truth is, that the underlying motive for both the g. and the bankers is the possibility to perpetrate theft. I find that this has been the case every time. Do not believe their explanations of good intentions but bad outcomes. Think, is it conceivable that the same people who time after time plan and execute super theft schemes successfully, would fail to plan and execute at least one level less complicated measures?

If you can easily walk on the curb, should I trust you you really really can't walk on the pavement?

I have found this pdf file to be a good explanation of some that is going on:

Thanks, FSK!

Anonymous said...

"Also, if the money only replaces funds lost through deleveraging and liquidation of declining assets it is not inflationary."

There is no such thing as money "lost". Money can only be "lost" for as far as your account is concerned. These same money are in someone's else pocket right now. This is why ANY bailout is inflationary.

You bet with me on whatever. You had lost money. This means I have won money. Now, you have bribed Paulson to bail you out. Paulson sticks both of us with debt, and sends you over the money you have lost to me. He does it by increasing the number of units of account. The result is that I have made money on my correct bet, and yet I will pay for your bad decision. On the other hand you were wrong, and yet you have your money refunded to you. So, where is the punishment for your bad decision?

Show how money can disappear, if you want to show that a bailout can be other than inflationary.

smokey said...

"Show how money can disappear, if you want to show that a bailout can be other than inflationary."

Money is created through thin air by debt. When debt is repaid , money disappears back into thin air.

During the asset bubble, money created through debt drove asset prices higher which then expanded debt money, which then drove asset prices higher and so on in a positive feedback loop.

This exponential expansion reaches its limit when the ability to borrow more becomes constrained by insufficient income. This inhibits the creation of new debt which fed the inflation of asset prices.

The high debt-to-equity (leverage) ratios expected exponential inflation of asset values. But this inflation stops when the creation of new debt becomes saturated. It is at that point that assets must be sold in order to reduce the leverage ratios.

As this liquidation proceeds, the supply of assets overcomes the demand causing the prices of assets to fall, which further exacerbates liquidation and deleveraging, which then causes asset values to fall further and so on in a negative feedback loop.

As these debts are repaid, the money first created through debt disappears back into thin air.

The bailouts are an attempt to reflate; replace the money that is being lost in the system, and to slow the deflation of asset prices which is destroying capital and thus preventing the expansion of debt.

It appears that the authorities will try to reflate the system by government borrowing through the selling of treasuries into the market. This borrowing decreases the money supply and is therefore not inflationary.

If the authorities choose to monetize assets; that is, print money to buy them, then monetary inflation will occur only if the expansion of money can overwhelm the destruction of money.


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