However last night after learning about this latest bailout of AIG I've lost my patience and tolerance for any more money (including this latest) going to AIG. As much as I believe that shareholders should be protected, ultimately they own the company and elect the directors, etc. I understand most shareholders are not sophisticated enough to know what's going on in the companies they may have a few shares in, but when a company does this astoundingly poorly (and continues to do so), then the shareholders deserve to be wiped out as far as I'm concerned.

There should be some sort of “managed failure” of AIG so the company goes away, but it's obligations are met by another entity, minimizing the harm of an outright failure would cause.

As far as I'm concerned anything here on out is just sending good money after bad. I really feel mad over this latest bailout of AIG. Enough is enough.

First off, there is a big difference between China and the petrostates. When I said that the “rich” benefit from inflation, that is short hand for people that have a lot of assets. China is “rich” but it also is a huge creditor. They actually don't want there to be a lot of inflation because then it decreases the worth of our payments. By contrast the middle east has a lot of our debt but also has tangible assets, and inflation would flow into oil before other things, so they would like inflation.

However, in deflation it's harder to pay off debts, so when someone owes you A LOT of money, you don't want there to be too much inflation to erode the value, but you don't want them to default from having deflation destroy revenue streams too much.

So the answer is that if you are “rich” meaning you have a lot of assets, then you like inflation and hate deflation. If you are “rich” meaning people owe you lots of money, you hate inflation and like deflation unless people start defaulting. The optimal inflation rate for creditors is around 2%…which is why that's what the Fed tries to achieve.

While no one has suggested that the US would default from deflation (although they have talked about “implicit default” through inflation, meaning that we'd print so much money that inflation would rise faster than the interest payments on bonds and so bond holders would be losing value) that is a very real concern for other countries that have a lot of debt in foreign denominated assets because the amount of money contracts and seeks safe havens. This is what is happening to most of the developing world right now and many countries are on the verge of default. This is a big reason why Europe is in trouble per my link above.

In reality deflation is almost always accompanied by famine, geopolitical strife and eventually war. There is really no good reason for this other than cooperation breaks down, and IMO a large part of the reason that breaks down is because events happen faster than policy can react. That's the reason why our politicians are so scared and pumping trillions into the financial system, but the problem is that anything they create is just being sucked up by banks and people looking for safe havens…it's not making it out much into the domestic economy and not into the emerging economies at all. Pretty much our mainstream economics was driven by a theory that this would work and stave off a depression, but it's not (although there are very obvious reasons for this that I've long anticipated, but it's even worse than I could have imagined). I've read a couple of economists that have implored the government to stop wasting all its energy on the domestic situation and focus much more on the international situation before civil unrest starts flaring up, but eh, everyone is too busy blaming each other.

Really the most likely paths forward were laid out by Citigroup recently: either all the money injection actually kicks in and we have inflation on an unimaginable scale (for the US at least) or else deflation will continue and lead to in worldwide political strife. Of course I am surprised that they put that only for deflation because if inflation kicks in then oil and food will skyrocket so high that most of the world won't be able to afford it…which I think would lead to strife too.

To me the obvious way forward is to start being more concerned about material goods and distribution systems and use our money to make wholescale investments once the debt bubble has collapsed. But I'm just some guy.

Tax revenue would dry up so much that governments would have to contract greatly, but with deflation they would be able to fund a similar amount of services once prices collapsed enough. That's what I meant when I said it'd contract even while getting larger on a percentage basis. But on the other hand the welfare state would be more direct and easier to wean off of IMO.

*I put an asterisk by Germany because their banks are also extremely leveraged and they will probably be on the hook for bailing out Eastern Europe or the EU may collapse.

There is a massive political row in the UK now regarding the RBOS former chairman, who presided over this epic debacle, insisting on his entitlement to a $1.4 million annual pension.

The phenomenon of corporate governors fattening their wallets by incredible sums… while their companies collapse or go to near-bankruptcy… is not exclusively an American practice!

I think the size of the numbers has numbed the public consciousness. Or maybe the welfare state has dumbed them into dependence?
I am very surprised there is not more public outrage over this.

Re: Elrod's comment that “European governments should be doing much more to buttress AIG” this is a bit of a non-starter, as the EU is arguably in worse shape than the US over this crisis.

Look at the UK…where the Royal Bank of Scotland has posted a near-AIG record loss of 24 billion pounds!!! When one considers the comparative sizes of the UK to the US economy, this is a national nightmare.

The Guardian had an excellent photo montage representing what these (remember: single large firm – not even sectoral or national) losses would represent in real-world terms:

http://www.guardian.co.uk/business/gallery/2009…

The scale of the vanished wealth is staggering.

If we survive all this, the historical accounts of the crisis will be fascinating.

I imagine students will look back on us as near-simpletons the way they often do today with regard to the world before the Great Depression: “Couldn't they see . . . ?”