THE BASIS POINT

Crescenzi: TARP, Other Bailout Measures SHOULD Work

Tony Crescenzi, chief bond strategist and Miller Tabak just posted a piece on CNBC about how, despite the ballooning Debt/GDP ratio that results from aggressive economic recovery measures, it might actually work out in the end because while we issue more and more debt to get out our our problems, the US remains a dominant power and most nations still hold dollar assets.

…the Keynesian and monetarist approach SHOULD work. The word “should” is key here. It “should” work just as it has for 70 years. Then again, given the debt/GDP ratio maybe it won’t. Maybe borrowing money to solve a debt problem won’t work. Maybe it is another Ponzi scheme, where the debts of one generation are pushed to next yet again.

The saving grace to the dilemma is this: The U.S. remains the dominant world power, politically, economically, and militarily, and no nation has been spared in this crisis, which means that on a relative basis, dollar assets will remain supported, enabling us to get out of the mess through the Keynesian and monetarist approach. Second, of the $51 trillion in debt, only $5 trillion is of the federal sector, a manageable level relative to GDP, with room for it to increase a couple trillion without being a problem. A risk is that the $5 trillion grows $3 trillion from GSE debt and from burdens associated with investing in financial institutions.