STAFF NEWS & ANALYSIS
Financial Crisis Tab Already in the Trillions
By - November 18, 2008

Given the speed at which the federal government is throwing money at the financial crisis, the average taxpayer, never mind member of Congress, might not be faulted for losing track. CNBC, however, has been paying very close attention and keeping a running tally of actual spending as well as the commitments involved. Try $4.28 trillion dollars. That's $4,284,500,000,000 and more than what was spent on WW II, if adjusted for inflation, based on our computations from a variety of estimates and sources. Not only is it a astronomical amount of money, its' a complicated cocktail of budgeted dollars, actual spending, guarantees, loans, swaps and other market mechanisms by the Federal Reserve, the Treasury and other offices of government taken over roughly the last year, based on government data and new releases. Strictly speaking, not every cent is directed a result of what's called the financial crisis, but it arguably related to it. – CNBC

Dominant Social Theme: A price we bear for living in a free market society.

Free-Market Analysis: We estimated yesterday that the price of the ongoing bailout, worldwide, would be in the tens of trillions, or even over US$100 trillion. Now along comes an article that makes the point that the current tab, a few months into the "crisis" in America alone is already pushing US$5 trillion. This figure is meaningful in a number ways.

First of all, the number makes us happy in terms of prognostication since we were quite aware the figure was mounting quickly in America and elsewhere (and may already be at US$10 trillion worldwide). But the number is also quite frankly irritating because it shows how little money means in a fiat money environment. Billions of people scratch out a living and scrimp and scrape their entire lives to save a small nest egg. But a handful of Masters of the Universe – who often speak piously about monetary discipline and savings rates – can summon trillions of a dollars in a matter of weeks if they need to. Finally, the figure begins to prove our contention that this is a fiat money crisis, not a financial one.

Let's elaborate a little. As far as the first point is concerned, the G20, or Gang of 20 as we like to refer to them, met recently and pledged to do everything in their power to help stop the current unwinding. What that means practically (one alternative anyway – see next article for an interesting additional solution) is that they will throw tons and tons of money at the problem, hoping that somehow so much cash sloshing around will help kick start the system. There is no art to it, no science, nor discipline. The models that Western governments are so proud of have gone out the window, proving once again the efficacy of free-market economics, which proudly disparages econometrics as a false science. Indeed it is. It is very difficult to build any successful kind of economic model over the long term, and in a fiat-money environment it is quite frankly impossible.

As regards the amount of money being pushed into the economy – yes, it is irritating and more than that. Most people, were they to figure out how much money was being produced, would be startled. In truth, the amount of money and credit that central bankers have at their disposal is breathtaking. It seems to make a mockery of budgetary concerns, both personal and governmental. All over the world there are shouting matches between husbands and wives and between governmental entities, large and small, about saving and spending money. But it turns out, when push comes to shove, that there is an almost unlimited quantity of money available to a specific class of bankers. Such power over money is difficult to fathom.

Finally, the discipline of central banking is likely to be called into question by all this spending. The Western model of economics, often known for its subset, econometrics, would tend to claim that economic variability is predictable and that the past provides at least some clues about the future. This may be true, to a limited degree, but certainly not in a fiat-money economy. In a fiat-money economy such as we have now, central banks inject unlimited amounts of money and credit into the system, creating first booms and then, eventually busts. In order to counteract the busts, central banks inject more and more money into the system and the system reflates. But eventually this reflation results in a bigger bust, because the economy never gets a chance to thoroughly unwind. Central bank money flows are constantly pumping it up and pushing it out of shape until the inefficiencies become truly monumental. That's where we are at now.

After Thoughts

We will bet that the money flows provided by governments and central banks will not be admitted to in their entirety because they are too embarrassing. It is difficult to demand higher taxes from long-suffering citizens when the amount of money you can inject into the economy in a single, short period amounts to the trillions. As portfolios deflate and savings drop, the whole idea of saving and investing in a fiat-money environment becomes an increasingly questionable procedure. That is why the savings rate continues to drop: People known instinctively that fiat money loses value over time and the best way to leverage fiat money is to borrow against it – because what you pay back tomorrow will be worth less than what you are borrowing today.

This is entirely unlike what occurs in an honest money environment where gold and silver hold their value and actually add value as technology makes goods cheaper. In a gold and silver honest-money economy, savings would gradually inflate on their own and people would feel less impelled to place funds in stocks markets that go up and down unpredictably. The free circulation of gold and silver are an immediate solution to the current fiat-money crisis. We anxiously await this recommendation from the Gang of 20.

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