[hope_full]

I understand it's the taxpayers that are funding this, but they're not funding it until 2009 or well beyond. In the meantime, the US government will be writing a check for $700 billion sometime next month (or next week).

Will the creation of this "debt/loan" (to be re-paid by taxpayers) simply introduce $700 billion worth of new dollars into our currency, thus causing a fantastic amount of inflation of our US dollars? Or does China still have an appetite for more of our debt?

I'm really puzzled as to where they're getting the money for this bailout. This is a fantastic sum of money - just fantastic - and they can't reach into the pocket of Social Security or elsewhere to get it.

[misterno]

China will buy all treasury bonds that is necessary.

Why?

Because if they do not buy it, US interest rates should go up which will cripple the consumption in the US thus hundreds of millions of immigrant workers in China's big cities will be laid off. This means social disturbence and riots across China.

In essence, China has to buy these treasury bonds yielding %3-4

They can not reinvest this huge amount of money into their local economy because they do not want inflation going up.

So we are safe and sound don't worry. China will always buy these low yielding bonds.

What? You did not read this in Wall Street Journal? You will never read about conversations and secret deals between Treasury of China and the US Treasury or FED, these kinds of deals are always kept secret.

How else can you explain a poor country's buying the richest country's low yielding bonds even though the rich country's financial industry's lending practices are extremely questionable and all out of whack and ridiculed by the poor country's head of treasury.

[DantesPeak]

Repost: http://www.peakoil.com/post777080.html

The only financial instrument remaining in the US that is worth the paper it is printed on, in the world market, is Treasuries. Bill Gross of PIMCO came out yesterday (?) and said that even though he is supporting the $700 billion bail-out (talking his book) that it will require AT LEAST another $500 billion more to do the job.

If the Treasury is forced to float $1.2 trillion in new paper, the US dollar will become worth LESS than the paper it is printed on. Foreign nationals, as well as foreign central banks, will shun it like it’s premier skunk oil. Your cheap Chinese toaster will cost $200 and the US economy will sink like a rock. Your retirement plan will become equivalent in value to a Big Mac without the lettuce, and a pair of shoes will cost two weeks of wages.

If the bill is not passed the American worker will be crushed with increased taxes and higher costs. No one is any longer loaning us money, if one hasn’t noticed. Schools will be working on a three day basis and most people won’t be working at all.

Anyone who believes that it is possible to legislate the country out of this problem should stop snorting the Kool-Aid. It eventually does permanent brain damage!

The US is piling up debts at an exponential rate. As we near the end of the fiscal year, the amount of new debt issued this year has reached $780 billion. As best as I can determine, the Fed issued about $350 billion in new money last week and about $600 billion over the last year. The impact of that $600 billion in new fiat money will cause tremendous distortions to the economy. If the Fed continues to finance the 'bailout program' and F & F with new fiat money, we may see consumer prices also start rising at an exponential rate.

If the Fed chooses not to 'print' money, the government will essentially suck all the cash out of the economy - creating the deflationary conditions that deflationists here have warned about.

Either way, the problems we face no longer can be fixed by government.

[emersonbiggins]

China will buy all treasury bonds that is necessary.

Why?

Because if they do not buy it, US interest rates should go up which will cripple the consumption in the US thus hundreds of millions of immigrant workers in China's big cities will be laid off. This means social disturbence and riots across China.

I'm not so sure about that. An article from The Economist back in January of this year ties 11% of the Chinese economy to their exports. And that's ALL exports, not just those to the US.

Significant, but not riot causing.

[BigTex]

The U.S. will borrow the money for any bailout plan, just like it has borrowed the money for every other misguided government action of the last 60 years.

This plan is not inflationary. Inflation requires rising wages. Without rising wages, inflation simply creates demand destruction, which stifles economic activity, which leads to deflation, not inflation.

In a credit crisis, inflation is never going to be the problem.

Japan has been trying to create inflation for 15 years. Every time they inject money, the banks sit on it. Inflation requires that money be available in the form of credit, which is the whole problem right now--credit is drying up, which is very deflationary.

It's like a game of musical chairs, except there are 300,000,000 people and only a few chairs. The chairs will go to the people who do not depend on credit to function or survive.

[DantesPeak]

You could have inflation rising much faster than wages rise.

Granted there will probably be many prices falling at the same time, and those items that rose the most may only be the most essential - energy and food.

There is no doubt that such as situation is economically deflationary, and will lead to great job losses. But there could be financial inflation and economic deflation at the same time. In fact we've seen it here before in the US in the 1970s and 1980s and around the world in many other countries.

[BigTex]

You could have inflation rising much faster than wages rise.

Granted there will probably be many prices falling at the same time, and those items that rose the most may only be the most essential - energy and food.

There is no doubt that such as situation is economically deflationary, and will lead to great job losses. But there could be financial inflation and economic deflation at the same time. In fact we've seen it here before in the US in the 1970s and 1980s and around the world in many other countries.

In an environment of credit contraction and static wages, you will only see rapidly rising prices for a short period before demand destruction sets in because people cannot pay inflated prices for goods if they have no money and no lines of credit.

It's simply not possible to have sustained inflation without rising wages. Someone has to be able to buy things that are rising in price for prices to continue rising.

I think that is one reason that peak oil is likely to be far more deflationary than inflationary. Expensive resources destroy economic growth, which means everyone has less money in their pocket, which means prices tend to fall.

When you combine resource constraints with credit contraction, you've got a deflationary double whammy.

But gold is still likely to rise in value because wealth protection, rather than wealth appreciation is likely to become a dominant theme.

[BigTex]

It's important to remember that hyperinflation is mostly a psychological phenomenon that employers have to buy into as well.

One look at 30 year bond rates and their 25 year trip to near 4% should tell you that inflation is not our biggest problem.

Everyone says 30 year rates are going to rise, which is what they've been saying for 20 years as they have fallen year after year.

It's a weird situation.

[DantesPeak]

To make up for lost wages, there's nothing to stop the US government from printing up money and distributing it to all.

Essentially that was the concept behind the rebate program in the second quarter, which was more a response to high energy prices than general credit contraction.

There may still be a second rebate progarm this year, which I predicted some months ago here at po.com. I also think whether or not there is a rebate program in place in the fourth quarter, there will be a second or third rebate program in the first quarter 2009.

Granted again this won't stop a credit collapse and will likely accelerate the credit collapse. It's also possible that the period of high inflation won't be very long as the credit collapse has been mismanaged and has gained a lot of momentum. As far back as 2005 when we started discussing economic collapse, I said we could hold on until about 2010 before economic collapse, but now it appears we won't make it through 2009.

If you have the President making speeches that an economic collapse is ahead, the end can't be too far away.

Due to unexpected financial distortions, we could still have $10 gas and 25% unemloyment in 2010 or 2011.

[BigTex]

To make up for lost wages, there's nothing to stop the US government from printing up money and distributing it to all.

Essentially that was the concept behind the rebate program in the second quarter, which was more a response to high energy prices than general credit contraction.

There may still be a second rebate progarm this year, which I predicted some months ago here at po.com. I also think whether or not there is a rebate program in place in the fourth quarter, there will be a second or third rebate program in the first quarter 2009.

Granted again this won't stop a credit collapse and will likely accelerate the credit collapse. It's also possible that the period of high inflation won't be very long as the credit collapse has been mismanaged and has gained a lot of momentum. As far back as 2005 when we started discussing economic collapse, I said we could hold on until about 2010 before economic collapse, but now it appears we won't make it through 2009.

If you have the President making speeches that an economic collapse is ahead, the end can't be too far away.

Due to unexpected financial distortions, we could still have $10 gas and 25% unemloyment in 2010 or 2011.

But people will have to SPEND the stimulus for it to be inflationary. If they use it to pay down debt or just put it under the mattress it will have no effect.

Again, this is what happened in Japan.

If no one has any money, who will buy the $10 gas?

Unfortunately, the one thing that might work right now would be a big tax cut, but we already did that and can no longer afford another one.

[Duende]

Big Tex wrote:

In an environment of credit contraction and static wages, you will only see rapidly rising prices for a short period before demand destruction sets in because people cannot pay inflated prices for goods if they have no money and no lines of credit.

It's simply not possible to have sustained inflation without rising wages. Someone has to be able to buy things that are rising in price for prices to continue rising.

In a credit crisis, inflation is never going to be the problem. If no one has any money, who will buy the $10 gas?

Big Tex, while I agree with your basic premise - that 'in an environment of credit contraction and static wages, you will see demand destruction in the face of rising prices' - it will not happen quickly.

This is because people will continue to use those credit accounts which are plentiful and so easy to overexploit - credit cards. As long as the interest rates are "low" for credit cards (under 20%), people will use them to bridge the gap. Yes, they will paint themselves into a corner eventually, but this may slow down the collapse quite a bit.

It may be interesting to watch the personal debt figures over the next few months rise. Hell, for all we know at this time next year we'll be talking about a bail out for people with high credit card balances?

[Snowrunner]

I'm not so sure about that. An article from The Economist back in January of this year ties 11% of the Chinese economy to their exports. And that's ALL exports, not just those to the US.

Significant, but not riot causing.

This was always the question for me: How far had China gotten to get a domestic market going?

They had a ten year plan, staring in the late 90s to get x% of their population into the cities and become "consumers". I think their target goal was 2010 and that's why they played "cheap workshop" for the world until then.

Now, maybe they haven't gotten quite as far as they wanted, but like in every game at one point or the other you have to decide if you are going to lose more in the long run by continuing what you're doing, or if you rather lose a little bit now and take the chips.

Then there is the question really how bad it could be. There is lots of talk about Chinese starting to riot in the streets etc. I think this is a fallacy in thinking, China isn't the US (where are the riots there?) nor is it Europe, it's a different culture with a different outlook on things, just because we in the West would like to think they will riot doesn't mean it has to happen.

Realistically the US (and in part the rest of the world) has gotten hit to the head and is now down for the count, not sure if we'll get up again (unlikely really, I think I Just heard the referee call out .

[misterno]

China will buy all treasury bonds that is necessary.

Why?

Because if they do not buy it, US interest rates should go up which will cripple the consumption in the US thus hundreds of millions of immigrant workers in China's big cities will be laid off. This means social disturbence and riots across China.

I'm not so sure about that. An article from The Economist back in January of this year ties 11% of the Chinese economy to their exports. And that's ALL exports, not just those to the US.

Significant, but not riot causing.

If what you are saying is right, then why is China buying bonds yielding 3%? They either know something or they are just plain stupid.

[BigTex]

Big Tex wrote:

In an environment of credit contraction and static wages, you will only see rapidly rising prices for a short period before demand destruction sets in because people cannot pay inflated prices for goods if they have no money and no lines of credit.

It's simply not possible to have sustained inflation without rising wages. Someone has to be able to buy things that are rising in price for prices to continue rising.

In a credit crisis, inflation is never going to be the problem. If no one has any money, who will buy the $10 gas?

Big Tex, while I agree with your basic premise - that 'in an environment of credit contraction and static wages, you will see demand destruction in the face of rising prices' - it will not happen quickly.

This is because people will continue to use those credit accounts which are plentiful and so easy to overexploit - credit cards. As long as the interest rates are "low" for credit cards (under 20%), people will use them to bridge the gap. Yes, they will paint themselves into a corner eventually, but this may slow down the collapse quite a bit.

It may be interesting to watch the personal debt figures over the next few months rise. Hell, for all we know at this time next year we'll be talking about a bail out for people with high credit card balances?

Companies are already reducing credit lines, though.

American Express lowered the credit limits for something like half of their cardholders last week. (Sorry, no link, heard it on CNBC)

I agree that the consumer locust swarm will head to the credit cards next, having devoured every other form of credit available. But that, to me, is pretty ominous. However bad an idea a home equity loan is if it's for the purpose of more consumption, a credit card is an even worse idea.

The reason I think that demand destruction is going to hit pretty quickly across the board is that we are seeing a one-two punch of rising prices due to higher input costs (symptom of peak oil) and less discretionary income as a result of the credit mess and static wages.

Across the board demand destruction for discretionary consumer goods is another word for economic death, not just here, but in all of the countries that depend on U.S. consumers to keep their economies going as well.

Capitalism doesn't work in a steady state. There must be growth.

The study of all of this will be know as "peakonomics."

[threadbear]

To make up for lost wages, there's nothing to stop the US government from printing up money and distributing it to all.

Essentially that was the concept behind the rebate program in the second quarter, which was more a response to high energy prices than general credit contraction.

There may still be a second rebate progarm this year, which I predicted some months ago here at po.com. I also think whether or not there is a rebate program in place in the fourth quarter, there will be a second or third rebate program in the first quarter 2009.

Granted again this won't stop a credit collapse and will likely accelerate the credit collapse. It's also possible that the period of high inflation won't be very long as the credit collapse has been mismanaged and has gained a lot of momentum. As far back as 2005 when we started discussing economic collapse, I said we could hold on until about 2010 before economic collapse, but now it appears we won't make it through 2009.

If you have the President making speeches that an economic collapse is ahead, the end can't be too far away.

Due to unexpected financial distortions, we could still have $10 gas and 25% unemloyment in 2010 or 2011.

But people will have to SPEND the stimulus for it to be inflationary. If they use it to pay down debt or just put it under the mattress it will have no effect.

Again, this is what happened in Japan.

If no one has any money, who will buy the $10 gas?

Unfortunately, the one thing that might work right now would be a big tax cut, but we already did that and can no longer afford another one.

Real estate dove in Japan, but what did the general cost of goods, at the supermarket do? Also, oil wasn't a strong determining factor in the Japanese depression. Oil prices are likely going to remain surprisingly resilient, going forward, as most fiat is going to be debased, in the short term. You're basing your argument on the idea that prices tend to drop to match what the masses can afford. I can tell your age, by this argument. Having lived through 70's stagflations, I can guarantee that this is not always the case.

[BigTex]

Real estate dove in Japan, but what did the general cost of goods, at the supermarket do? Also, oil wasn't a strong determining factor in the Japanese depression. Oil prices are likely going to remain surprisingly resilient, going forward, as most fiat is going to be debased, in the short term. You're basing your argument on the idea that prices tend to drop to match what the masses can afford. I can tell your age, by this argument. Having lived through 70's stagflations, I can guarantee that this is not always the case.

I was born in 1970, so I lived through it as a child. Nothing was ever more expensive than someone was willing to pay.

I totally agree that oil prices will remain high, but production is likely to drop as a result of demand destruction more than peak oil (though the effect will be exactly the same).

If you have credit you can absorb high prices today by promising to pay tomorrow, but if you don't have credit, this fact lower the ceiling on high prices a bit.

What in the 1970s cost more than people were willing to pay?

The point I am making may basically be describing a path to civil unrest as people begin to realize that the $10 in their pocket won't begin to cover the $50 of expenses they have just to survive.

But prices will come down to the level of income available to spend, one way or another.

[americandream]

China will buy all treasury bonds that is necessary.

Why?

Because if they do not buy it, US interest rates should go up which will cripple the consumption in the US thus hundreds of millions of immigrant workers in China's big cities will be laid off. This means social disturbence and riots across China.

In essence, China has to buy these treasury bonds yielding %3-4

They can not reinvest this huge amount of money into their local economy because they do not want inflation going up.

So we are safe and sound don't worry. China will always buy these low yielding bonds.

What? You did not read this in Wall Street Journal? You will never read about conversations and secret deals between Treasury of China and the US Treasury or FED, these kinds of deals are always kept secret.

How else can you explain a poor country's buying the richest country's low yielding bonds even though the rich country's financial industry's lending practices are extremely questionable and all out of whack and ridiculed by the poor country's head of treasury.

Wow! I'm impressed.

[BigTex]

China will buy all treasury bonds that is necessary.

Why?

Because if they do not buy it, US interest rates should go up which will cripple the consumption in the US thus hundreds of millions of immigrant workers in China's big cities will be laid off. This means social disturbence and riots across China.

In essence, China has to buy these treasury bonds yielding %3-4

They can not reinvest this huge amount of money into their local economy because they do not want inflation going up.

So we are safe and sound don't worry. China will always buy these low yielding bonds.

What? You did not read this in Wall Street Journal? You will never read about conversations and secret deals between Treasury of China and the US Treasury or FED, these kinds of deals are always kept secret.

How else can you explain a poor country's buying the richest country's low yielding bonds even though the rich country's financial industry's lending practices are extremely questionable and all out of whack and ridiculed by the poor country's head of treasury.

Wow! I'm impressed.

China will stop buying our bonds when we stop buying their plastic crap.

It's a symbiotic relationship. The rate on the bonds is irrelevant.

[americandream]

China will buy all treasury bonds that is necessary.

Why?

Because if they do not buy it, US interest rates should go up which will cripple the consumption in the US thus hundreds of millions of immigrant workers in China's big cities will be laid off. This means social disturbence and riots across China.

I'm not so sure about that. An article from The Economist back in January of this year ties 11% of the Chinese economy to their exports. And that's ALL exports, not just those to the US.

Significant, but not riot causing.

Do you still believe these talking heads after all we have been through? The Oriental economies have a strange symbiosis with the West, a curious cultural/economic parasitism. How else can one explain the dynamics we continue to see between a mature Japan and the West. So I am inclined to agree with Misterno/

[Tyler_JC]

China is investing in the United States government.

They are buying influence.

When the time comes to attack Taiwan, they will call in the debt, and ask if we're willing to sink our economy in exchange for the island.

We'll threaten to nuke them, etc.

The end result will be the cancellation of most of the debt and the surrender of the island to the Chinese.

It's a business transaction.