I’m not one to pretend expertise on what the effects of the bailout would be, but it’s highly unlikely that we would get both inflation and recession at the same time, in that the two work against one another. It’s certainly possible that the dollar will fall further, except that it’s already quite low, and it’s certainly possible that inflation will rise, but it’s hard for me to see how it could rise by much, particularly in a recessionary environment. Then again, if there is no recession, then the bailout will have worked, and we won’t be stuck with depressed securities, but will be able to sell them off at cost or even a profit, as long as we don’t overpay for them, which I think is the only real danger of this deal, and why it needs serious oversight.

The point is that the situation is not all that bad, in that there’s a hedge situation here in which we are to some degree protected by the multiple levels of the whole deal. I really don’t know how dangerous the situation is without a deal, but I tend to take the word of disinterested economists that yes, it really is a serious matter, nothing to take lightly, and that doing nothing is actually the most dangerous thing. I certainly don’t like fear-mongering and pushing through bailouts that haven’t got any oversight or accountability, but an intelligently structured one could work as a good hedge in this situation.

None of that changes the overall structural problems with our economy, however. Rising oil prices seem here to stay, and a fallen dollar as well. I’m sorry, but I don’t see internal inflation as a serious danger, and that’s quite a different story than a falling dollar that increases the costs of imports. I could be wrong of course, and there’s a world of people who will bet either side of the coin, which is what these markets are all about. But recession seems far and away a more serious problem than inflation, which has not been a serious problem in some time, and does not describe our internal economic problems very well.

And besides, if we just elect a magical negro all will be well.

I should have been more clear about what I meant when I referred to the inflationary consequences of this plan and what I was saying when I commented. Fears of the effects from the infusion of capital from the bailout have already been driving investors away from the dollar. If the bailout goes ahead and the flight from the dollar continues we will see a rise in inflation. You’re right that the government is going to borrow the money, but it is what they are going to do with what they’ve borrowed that will drive the dollar lower, and that will combine with the already-rising costs driven by high oil prices. Maybe the Fed can get things back under control later, or maybe not. There will be very real negative consequences from this bailout for the cost of living for everyone, and that assumes that it will work as they say it will. So we’re either looking at a nasty correction without the bailout as banks try to deleverage and some fail, or we will see significant inflation, and in my view the latter is much more harmful.

Currency traders seem to think the inflation threat from the bailout is quite real. Take this story, for example:

As officials in Washington hammer out the details of the mammoth bailout package, investors are already weighing in with questions about what impact it will have on the U.S. economy and taxpayers. Among their concerns is the heavy borrowing the government is expected to undertake to pay for the plan – a move that sent the dollar lower versus its main rivals.

“What they’re doing is very, very inflationary … and a lot of people think the dollar is going to get crushed,” said Matt Zeman, head trader at LaSalle Futures in Chicago. “If I’m nervous about putting money in a bank, I’ll go out and buy gold and bury it in the back yard.”

Currency traders are saying this fairly frequently about what effect the bailout will have on the dollar, so I don’t think I was saying anything that was so strange.

You quoted the numbers as if they were accurate without double-checking them, I suppose because you’re not very good at that sort of thing. Which makes me kind of wonder what you are relying on for all this evaluation of economic possibilities.

Another example is GOM’s claim, that again you seem to accept without questioning, that the money is just going to be printed up by the treasury, leading to inflation. Simple untruth, easily checked. The money will come, as all deficit spending does, from selling treasury notes. This has economic consequences, certainly, but inflation is not one of them.

The point I’ve been trying to make here – and I’m by no means enthusiastic about the bailout, but I’m trying to look at it from the perspective of a dispassionate investor, evaluating the risks – is that the only real risk to it is that it doesn’t mitigate a recession, or a depression, and the value of the mortgages and properties that back these securities collapse and never returns, and we lose out on a large percentage of that 700 billion plus. I think that’s a very slim possibility, but not one that can be overlooked. The idea that the bailout will contribute to worsening any recession is being floated around by some, but I don’t see much merits in the arguments. Do you?

Now, philosophically and politically, I can certainly see why many would oppose the idea of a carte blanche bailout here. But economically, and by that I mean from the perspective of someone trying to achieve the result that creates or preserves the most wealth/value from this situation for both the government and the overall economy, it seems like a well-packaged bailout would work quite well. The government has more than a “selfless” interest in the welfare of its citizens at stake here, it has the issue of tax revenues to protect from the ravages of a recession, which will certainly drive them down. So risking some of its capital to avoid a revenue-killing recession is not in itself a bad play in the market. Politiically this is not very pleasant, in that most of us don’t like the government bailing out stupid greedy swine like this, but it’s really not about punishing the swine, it’s about achieving the best outcome for the non-swine.

GOM is right that we ended up militarizing ourselves out of the last depression, and let’s hope it doesn’t go there. But it didn’t have to be militarization. One of the big mistakes of the New Deal was not realizing how much deficit spending was really needed to snap the country out of that mess. There’s no reason that deficit spending has to be military in nature. How about spending hundreds of billions on alternative energy production, which has an actual benefit down the line, whereas military spending does not?

You don’t have to be a Marxist to figure that conscription can limit unemployment and provide discipline for unruly youth, a foreign enemy can justify suppressing dissent, and arms production financed by colored pieces of paper can yield employment for hoi polloi and profit for the few.

My guess is that if this sort of scenario comes to pass, it will be the libs that do it. Perpetual war for perpetual peace; oligarcy and centralization to defend “democracy,” intolerance in the name of diversity and tolerance.

My rant hormones are storming today. Bailout? Malarkey, stuff and nonense!

Are you saying their plan is to make the US into some kind of mindless, rampaging war machine? Sure, that will lower unemployment, but how does it not simply extend and exacerbate the economic problems at hand? After WW2, the Western Industrial world was devastated, and we filled the vacuum in a big way, making us very wealthy. I hope we don’t have to obliterate China and other East Asian countries in order to regain our competitive advantage in production.

Given the current state of affairs, If things happen like you say, we’ll look like North Korea.

*I wonder what comes next?

The last time, it was conscription and rearmament, financed by debt. We militarized ourselves out of the Great Depression.

Let’s make (Burma, Congo, Darfur, Iran, Somalia, Syria, Ukraine–pick any 3) safe for democracy?

Like the Roman, I seem to see “the River Tiber foaming with much blood”.

–Enoch Powell

Sooner or later, interest rates will have to rise sharply to shore up confidence in the dollar. We have no savings. What will we do then? We’re looking at a deep recession no matter what. Hopefully, we’re also looking at the end of Bretton II, and our government’s drunken, reckless abuse of monetarism. All of the fundamentals suggest the dollar’s reign is almost over. So is our pastime of borrowing to consume, with ever dwindling collateral.

I wonder what comes next?

conradg, the recession we might face without a bailout may not be that bad, but with the bailout we face a much worse recession. Your argument presupposes that the bailout won’t compound the problem.

Also the idea that the 700 billion balloons to 2.5 trillion because the money is borrowed assumed that the money isn’t paid back for something like 30 years, which seems highly implausible. Treasury rates are about 5% right now, and thus even if it takes 5 years to pay back, which it shouldn’t, that’s ballooning to about 850 billion. People who don’t do math well shouldn’t try to make economic arguments.

Just so. Can anyone, even our self appointed Masters of the Universe in NY & D.C., really have any idea how much these toxic securities are worth? We’ll know when vulture private equity firms swoop in and pick the bones of these dead companies clean: whatever they pay, that’s what they’re worth.

Pain has similar uses. It warns us not to overtax our bodies, and to rest when we are injured or ill. Morphine masks pain, but does not halt destructive bodily processes.

Bailouts extend the life of overvaluation of assets and grant a respite to inefficient firms.

Conservatives are wont to moan about the nefarious effects of food stamps and aid to dependent children on the morals of the poor. Welfare for investment bankers can’t be better. The eye of that needle keeps getting narrower and narrower.

Kyrie eleison. Repeat 400 times.