Worldwide bailouts: A word of caution

The most egregious consequence of these government policies is that businesses will continue to operate in an unsustainable fashion by taking too many risks, simply because the precedent has shown that the government will step in and shore up any sustained losses. If certain companies happen to reach a size deemed to be “too big to fail”, executives now have reason to believe they will be bailed out with taxpayer funds. And that’s the saddest part, that these policies risk setting us up for yet another fall.

As recently as April 2009, Bloomberg has reported that “the total amount spent, lent or committed by the US government and the Federal Reserve is $12.8 trillion.” To put that into perspective, that amount is almost equal to the total US GDP from 2008. By injecting that level of public (taxpayer) funds into private firms, it will only prolong the economic downturn and will have a severely negative impact on the recovery of economy in the long term. I believe the result of such actions will be the nightmare scenario: negative growth in the economy over the coming years along with hyperinflation, otherwise known as stagflation. However, in this case I believe a more appropriate term is in order: hyper-stagflation.

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