A Flood of Money ~ it can't work

Monday, October 13, 2008, 8:27 am, by cmartenson

Well, the G7 met and decided that what we needed was, unsurprisingly, a flood of money. An unlimited wall of new money to replace the money that mysteriously evaporated into the mist of the credit crisis.

I say "unsurprisingly," because this has all been tried before.

When John Law's infamous credit experiment started to unravel in 1720, the French authorities first resorted to decreeing that their failing paper promises were worth more than gold and silver, and then, upon the almost immediate failure of that edict, to printing as much as necessary to buy out the failing equity and debt issuances upon which the entire bubble was formed.

The whole thing collapsed in rather short order, and the angry, destitute crowds took matters into their own hands shortly thereafter.

Here's how I summarize the news from this weekend:
Ireland guarantees all bank deposits ($563 billion dollars of exposure)
France increases bank deposit insurance (exposure unknown)
Danish government guarantees all bank deposits ($6.5 billion dollars of exposure)
UAE guarantees all bank deposits ($13 billion dollars of exposure)
Germany guarantees all bank deposits ($549 billion dollars of exposure)
Portugal guarantees bank deposits ($28 billion dollars of exposure)
Australia guarantees all bank deposits (exposure unknown)
Spain increases deposit guarantees (exposure unknown)
UK increases bank deposits (exposure unknown)
New Zealand guarantees all bank deposits (exposure unknown)
EU guarantees interbank lending in unlimited amounts
EU raises bank insurance limits by 100% (but still only $68,000 per account)
UK plans to take majority stake in RBS and big holdings in Lloyds, TSB, HBOS, and Barclays ($60 billion dollars)

And I almost certainly missed a few things, because it was a firehose of information.

And the US? $1.5 - $2 trillion total cost for the next year.

So far I have not yet read ONE article that asks the most obvious question of them all, "Where will all this money come from?"

That's it. That's the $64,000,000,000,000 question.

"Where will all this money come from?"

It's a pretty obvious question.

So how come nobody is asking it?

Because the answer is the same as it was during the French South Sea Bubble in 1720 - it will be printed up by central banks.

Which raises the uncomfortable follow-up question, "So why is it that we are expecting a different or better outcome this time?"

It is a serious question, and it deserves a serious answer. But it's hard to get an answer to a question that practically nobody is asking....