The government crash

The amazing thing about crashes is that you can see them coming. They’re not surprises like earthquakes or meteor impacts. A sure sign of their approach is too much speculative lending, which contributes to the boom that sets up the bust. We saw it in housing in the 70s and 80s, which led to the S&L crisis, and again in the 00s. We’ve seen it over and over in tech, most famously with the dot-com crash.

Now we’re about to see the U.S. government crash, for the same reason.

According to Bloomberg (which ought to know),

  The U.S. government is prepared to provide more than $7.76 trillion on behalf of American taxpayers after guaranteeing $306 billion of Citigroup Inc. debt yesterday. The pledges, amounting to half the value of everything produced in the nation last year, are intended to rescue the financial system after the credit markets seized up 15 months ago.

  The unprecedented pledge of funds includes $3.18 trillion already tapped by financial institutions in the biggest response to an economic emergency since the New Deal of the 1930s, according to data compiled by Bloomberg. The commitment dwarfs the plan approved by lawmakers, the Treasury Department’s $700 billion Troubled Asset Relief Program. Federal Reserve lending last week was 1,900 times the weekly average for the three years before the crisis.

That’s trillion. With a tr.

Our debtors won’t be able to pay most of it back. Nor do we expect it to be.

And we can’t pay it back, unless we print all the money we need, or do the electronic equivalent.

Which will turn the dollar into the peso. Or worse.

What comes after that — or even during that — I hate to think about.

Or so it seems to me, on a cold Wednesday morning. Hope I’m wrong.

Meanwhile I would like to see more transparency than we’ve seen so far. Lack of it is the other story in the Bloomberg piece. Scary reading.

Hat tip to Dave for the pointer.

8 comments

  1. Shawn Powers’s avatar

    As sad as I realize it is, my instinct is to metaphorically curl into a ball and pretend it’s not happening. And truthfully, there’s not a whole lot I can do anyway. It’s depressing.

    And cold here too.

  2. laurent lathieyre’s avatar

    it’s about the money crash — as we know it. It’s not news there is something rotten in the kingdom of currencies. And change is opportunity… to see the bright side of it all ;-)

    You may find this link interesting : http://thetransitioner.org/wen/tiki-index.php

    (Reading/following you because I’m working on a VRM idea)

  3. Don Marti’s avatar

    John Robb points out the rise in price for
    Credit Default Swaps tied to the solvency of the United States government.

    All this bailout stuff is chump change compared to the amount that the US government will have to pay out in Social Security and Medicare for the baby boom generation ($40 trillion in so-called “entitlements” that will have to come from somewhere), so just wait a few years for the real freakout.

  4. Mike Warot’s avatar

    I think that Credit Default Swaps have already made themselves “too big to fail”… but the US government will hopefully resort to a new tactic because they can’t bail out something that huge… retroactively declare then null and void.

    In an ideal world, this would retrieve massive amounts of money from otherwise deep dark pockets of foreign interests.

  5. Russell Nelson’s avatar

    Don: since the money isn’t there, obviously the entitlements will be defaulted on. The age at which you can receive Social Security will start to rise. Medicare benefits will be cut.

  6. Russell Nelson’s avatar

    As Paul Krugman (the man who made the Nobel prize in economics jump the shark) said “We’ve got to do SOMETHING”.

    In fact, no, “we” don’t. http://www.washingtonpost.com/wp-dyn/content/article/2008/03/30/AR2008033001582_pf.html

  7. Annabel’s avatar

    Its not much different in the UK/Europe although the US will be scalable as per capita. The bubble was gonna burst for sure – if the average Joe could see it coming then why not Governments? Subprime housing lending, banking sector greed, bad debt lending….it had to come crashing down – it was just a matter of time..

    Job losses, social security payments raising, repossessions, bail out of whole industry sectors…where’s all this Government bail out money coming from anyway?

    Currency crashes and whole countries brought to their knees…a roller-coaster few months!

    BTW interesting link Laurent..

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