OMINOUS SIGN BEHIND PAULSON’S ACTIONS

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And as usual the taxpayer is on the hook in the biggest bailout ever, and forever after that.

It is largely self-inflicted, though. Americans don't produce as much as they consume. The resulting deficit mean that dollars flow out of the US economy at a ridiculously high rate. That money has to be invested somehow, and - much to the benefit of the US economy - foreigners have largely been happy to buy government debt with it.

So far, so good. Well, not very good, as the debt load does become a problem in its own right, but it is the best possible deal for American consumers.

But even the huge deficits that the Bush administration have been running simply don't suffice - the American people insist on running even higher deficits. That means that foreign banks have to buy more than just treasuries. Enter Fannie and Freddie debt.

In principle, this is simply an extension of the same principle - somehow the US has to generate a vast amount of government-backed investments for foreign banks to invest in.

Fine, so perhaps American taxpayers may not have realized that Fannie and Freddy were playing such a crucial role. But surely everyone should have realized that persistent trade deficits, government budget deficits and rapid consumer credit growth all indicate that the US is simply consuming more than it can afford.

The American taxpayer is slowly being presented with part of the bill for the past 25 years of credit-fueled shopping, as the rest of the world is slowly coming to the realisation that the US is happy to keep spending, and isn't about to start paying back. If anything, Americans should be happy that the ride went on for so long.

Endorendil: But surely everyone should have realized that persistent trade deficits, government budget deficits and rapid consumer credit growth all indicate that the US is simply consuming more than it can afford.

LeRoy: No way! Dick Cheney hisself said that deficits just don't matter. So there! He's the Vice President, dude! He cain't be wrong!! And that Rudy Guiliani feller told us that "Americans have a patriotic duty to spend." He cain't be wrong, neither! He was the Mayor of New York City!! People as high up as that just don't get things wrong! We TRUSTED them! They told us the truth! Are you saying they were LYING?!??

Endorendil also writes: It is largely self-inflicted, though. Americans don't produce as much as they consume. The resulting deficit mean that dollars flow out of the US economy at a ridiculously high rate. That money has to be invested somehow, and - much to the benefit of the US economy

LeRoy: I believe your last phrase might have been much more accurate, and much more persuasive, if you had written: "much to the short-term benefit of the US economy."

Just an editorial suggestion....

Sarcasm. I like it.

I would have written short-term, but the structure of international finance has been to the US's advantage for at least 5 decades. If the US hadn't started abusing its position, it probably could have lasted more or less indefinitely. As it is, it took Reagan and TWO Bushes to wreck the ride. Although, if it hadn't been for Clinton, the game would have been up even sooner, I guess.

The main question is whether anyone would believe that the US has truly changed and will revert to its pre-Reagan fiscal discipline. The drawback from having had Clinton followed by Bush II is that everyone realizes that sensible policies in the US may not last, and that Americans are willing to re-elect abominable leaders even after their policies have shown to be disastrous.

My bet is that the rest of the world will be happy to help the US back on its feet, but that it will start reducing its exposure to the US as soon as that seems feasible. That would slowly reduce the US's advantage, and eventually make it possible for the rest of the world to let the US feel the consequences of its follies.