This is what is going to happen

[ThomWV]

It just drives me up the wall to hear people speak about 'the bailout' without considering the source of the funds.

Bailouts, loans, guarantees, cash-out-the-door; no matter if we like it or not the Federal Government is well into the act (no one could reasonably call it a process) of spewing billions, if not trillions, of dollars into the nation's finance system and possibly its major industries. However what answer do you get when you ask "Where's the money coming from?" Generally the response is "The Government". OK, what does that mean? The answer is simple enough, We the people, we are the Government. We are the ones that have to come up with that money and if we don't have it - and we certainly do not have it - then we must borrow it and follow that up by repaying the debt. It is simple and plain to see but it just doesn't seem to be sinking in what that means. So let me explain how its going to work.

Our Government is going to sell bonds to raise the money and you and I are going to pay taxes that cover the interest on those bonds starting immediately and continuing well past the decade a child born today will become a taxpayer. At the end of the bond's life we will issue another bond to raise the money for the first bond's retirement and the process of paying that interest will continue through another generation of taxpayers.

Today when you or I pay our taxes we get some services for our money. We get military protection, we get meat inspection, we get levies along rivers, and we get Rangers in our Parks; our tax dollar pays for all these things and many more. But will they tomorrow? No. Tomorrow they will pay interest on the loans we take out today and if we want to maintain services we will have to raise taxes to do it. Bush proved conclusively that lowering taxes does not increase revenue and so we are faced with the alternative. That is that the only completely predictable result of the 'bailouts' is that in the future at the very least we must expect increased taxes and likely reduced services at the same time. Now, how does a politician sell that to the people? Easy, just say the Government is going to take care of it and hope with the hope only someone up for reelection can know that it shoots over everyone's heads just who the Government is.

[rucky]

1. All with a dollar that buys less.

[ThomWV]

2. Or much worse yet, a dollar that buys more. Have you thought about Deflation?

The effects of deflation can be worse than inflation.

[BeFree]

3. Well, you are right

However, at this moment, I have it on good authority, that the interest we are paying on the T-bills is at a record low.

I guess since we sent trillions of extra dollars to the oils suppliers over the last few years and those suppliers are awash in cash, that finding a reasonably safe investment is the only market that has seen an increase in buyers, driving the price (interest on the bonds) down.

[HamdenRice]

4. Here's where I disagree: "taxes that cover the interest on those bonds "

In general, I agree with your premises. I was thrilled that Clinton had set us on a course to eliminate the debt and hence the wasteful interest paid mostly to rich people and institutional investors that is a dead weight drain on what the federal government can provide in services. The end of federal debt meant the possibility of things like universal health care and free higher education.

But the reason that federal borrowing in a sense "doesn't matter" right now, and the reason that your phrase, "taxes that cover the interest on those bonds," and my orthodox analysis in the first paragraph no longer apply, is that the financial markets are so scared, and they are so desperate for a safe place to stash their money (federal treasury bonds being basically considered the only safe such place), investors are right now giving the federal government free money. To put it another way, when you calculate interest, maturity, and so on, the yield on federal bonds is effectively zero to the investor.

If we were talking about, say, military spending, even with zero interest rates, the federal government would have to pay back its expenditures with taxes. That's because once you spend a dollar on the military, you don't get it back.

But the federal government isn't making expenditures; it's making investments. Granted, those investments are risky, and at this point, it seems to me they need to go further toward full nationalization of several banks. But because they are making these expentitures as an owner and investor, the stuff they are buying pays income.

For example, next year, the federal government will earn about $6 billion on $125 billion in preferred shares it purchased in one tranche of the bailout. But the interest it will pay on that $125 billion is much less than $6 billion in preferred dividends it will take in; after a few years those dividends will rise to $11 billion, but the feds will have locked in basically a zero interest cost to pay investors. If the bailout works (and if we want to survive, I think we have to hope it does) and the financial system eventually recovers, the banks will repurchase that preferred at face value for $125 billion, so the taxpayers will not have to pay for it.

Basically the federal government is becoming the biggest hedge fund in history , but unlike any other hedge fund, it will have a massive amount of control over the economic conditions and interest rates it's betting on.