The $8.5 trillion bailout

SimpleSam06

The article here outlines the true extent of the various bailouts and assistance programs set up by the US government, which comes to a total commitment of $8.5 trillion, $3.5 trillion already tapped.

cavedave

It is not quite a fair comparison. The size of the economy has changed so one trillion inflation adjusted is less of the economy then it used to be. Also the bailout is supposed to be a loan so the Americans should get their money back later. Hold your breath on that one.

Here is one thing. Financial cost inflation adjusted to US of WW2 is less then of the bailout so far.[123 4]

mike65

WW2 prolly paid for itself in the end.

silverharp

It makes me wonder if inflation is being counted properly over the years, the idea that that the iraq "police action" war seems to overstate it, versus the Vietnam war coming out at near the same cost either means the US military has become bloated or maybe they need to do more hedonic adjustments and are ignoring the productivity improvements in being killed by a smart bomb versus being carpet bombed :pac:

BenjAii

silverharp wrote: »

It makes me wonder if inflation is being counted properly over the years, /QUOTE]

I have never understood why house prices are not included in inflation ('im sure there is a good technical reason).

If they were it would be true to say of the US economy that most of its 21st century "growth" has been illusionary, it has just had rampant inflation and what is now happening could be more accurately described as a huge deflationary spiral.

Mikel

BenjAii wrote: »

I have never understood why house prices are not included in inflation ('im sure there is a good technical reason).

Because they're a capital asset.
However mortgage repayments (and their fluctuation with interest rates are)

BenjAii

Mikel wrote: »

Because they're a capital asset.
However mortgage repayments (and their fluctuation with interest rates are)

It's interesting though that the effects of house price bubbles are parallel to those of inflation/deflation for many people.

On the way up, they reduce the real value of money for all those purchasing and increase the value of those peoples debt when prices are on the way down.

silverharp

BenjAii wrote: »

It's interesting though that the effects of house price bubbles are parallel to those of inflation/deflation for many people.

On the way up, they reduce the real value of money for all those purchasing and increase the value of those peoples debt when prices are on the way down.

I dont mean to sound conspiratorial on this but there is an incentive to understate and "manage" the number as it acts as a trigger for social welfare and other wage agreements.
Looking at the US the way inflation has been counted has been changed over the years and nonsense aadjustments have been introduced like hedonics and substitution to reduce the end number another brilliant adjustment is Owners equivalent rent, see below

http://globaleconomicanalysis.blogspot.com/2008/12/case-shiller-cpi-vs-cpi-u-november-2008.html


"Owners' Equivalent Rent" (OER) is the largest component in the government compilation of the CPI. OER is a process in which the BEA estimates what it would cost if owners were to rent the homes they own from themselves. I do not believe this to be a valid construct of prices.

By ignoring housing prices, CPI massively understated inflation for years. The CPI is massively overstating inflation now.

In normal times with rents in sync with home prices, it did not matter much if one used OER or actual home prices. It's a remarkably different story now. We have just seen the biggest housing bubble in the history of the world. At the peak of insanity, home prices were 3 standard deviations above rental prices and 3 standard deviation above wage growth.

Now, the important factor is that home prices are crashing, with quite a big drop still needed to get back to historic norms. With that in mind, housing can be expected to be weak for quite some times.

The treasury market seems to have figured all this out quite nicely. Pundits screaming "treasury bubble" clearly have not.

In summer of 2005 the above chart shows the CPI at just over 4% with the Fed Funds Rate just under 4%. CS-CPI, a better measure of the CPI, was near a whopping 8%. Thus real interest rates were stunningly low starting in 2003. The Fed kept interest rates too low for two years. This clearly contributed to the housing bubble.

The Situation reversed in Autumn of 2006 with the Fed Funds rate at 5.25% and CS-CPI under 1%. This helped pop the bubble (a good thing) but it would have been better to not have the bubble in the first place.

SimpleSam06

cavedave wrote: »

It is not quite a fair comparison. The size of the economy has changed so one trillion inflation adjusted is less of the economy then it used to be.

Its around 65% of the GDP of the US, or almost doubling the national debt in one year. Thats a lot of notes to print, and no guarantees its finished yet.

cavedave wrote: »

Also the bailout is supposed to be a loan so the Americans should get their money back later. Hold your breath on that one.

If the cure for giving out bad loans and leveraging them heavily is to give out loans to those same institutions who were unable to recoup their original losses, I wouldn't be holding my breath to see returns on that.