@ AC 29th March 2009 11:52 GMT
I love the way you made up actual numbers that are an order of magnitude different from the easy to find real numbers. Even given the US/UK million/billion/trillion mismatch, you're quite a hoot.
Actual total estimate of bailout costs: ~$1 trillion US. That's $1*10^12.
Your assertion: $12 trillion,
Error factor: 11
Typical acceptable error factors: 0-3
(Yes, the fact that I just needed engineering notation to make the numbers clear is itself an indictment)
However you put it, the money lost to bad loans has ALREADY left the economy. (It is debatable if the value of the real property never got as high as the price, or if the value rose and then sharply fell. Either way, value was expended and removed.) Now, the US has a similar total total domestic value to what it had about 10 years ago, and ~7% LESS money.
If you think having 7% less money isn't a big issue, then I ask: is 7% ADDITIONAL unemployment a big issue? Would a 7% pay cut be a big issue? How badly would across-the-board deflation of 7% hit a small business, given that their loans are fixed rate, and the inventory they have has a fixed dollar cost? (Prices CAN'T go down right away; a 7% drop in retail price means a ~14% drop in unit profit before fixed expenses (at x2 markup, typical for a small retailer). If fixed expenses (~50% of total expenses) also go down by 7%, then your typical small retailer has their bottom line drop by about 11.5% of their revenue. If their total margins were that high to begin with, they wouldn't be a small business for long.
Wholesale unit cost: $10
Retail unit price: $20
Fixed expenses (lease, payroll, loan payments, etc): $6000/month
sales X marginal profit = $7000/month, - fixed expenses = $1000/month for the owner to live on.
Drop the price by 7%, to $18.60/ unit. Now you have $6,020/month from sales, -$6000/month expenses, the owner gets $20 a month.
In an ideal economy, the wholesale price would rapidly drop, as would the fixed expenses, however nobody can afford to drop their prices first: The wholesaler has a similar problem, shift raw materials for wholesale price and wholesale price for retail price, and the labor can't get less expensive before everyone's goods get less expensive.
The voting public would never go for government-run corporations, so the only way to control the economy is to keep the available money equal to the available value.
Put differently, if the money supply is kept constant, as by a gold standard or similar gimmick, then eventually a few tycoons will have -all- the money, and nobody else will have any. (If one consistently earns more than one spends, one's money will always go up. Eventually, it must reach the point where there is no money one doesn't have. Therefore, it is impossible for one to spend less than all the money one makes. Since long-term saving is IMPOSSIBLE, investments or large business loans don't happen, and the economy stalls from the top.
Fiat currency, released in the form of deficit spending, allows the money supply to remain equal to the total value of goods and services provided. The current issue is that the supply is poorly controlled. Also note that in cases of massive reduction of value -without- an associated reduction in money would require that money be removed- I.E. taxed from the public and NOT spent, ever. This could occur if a trillion dollars of -uninsured- consumer goods were to catch fire and be burned, bankrupting the owner(s) and the owner(s) lender(s) but the money that would have bought those goods is still in the market. (If they were insured, then the insurance company loses money roughly equal to the lost value. If the owner(s) can withstand the loss, they have lost the money. If the lender(s) withstand the loss, then they provide the money. However, if the lender(s) cannot float the damage, then EVERYONE pays. A total of a trillion dollars needs to be thrown away. (How about we (on paper) give it to the banks, allowing the previous economy to resume, and mandate additional fire protections?)
Wait, that's what the issue is about?