The US Senate have passed the bailout plan and sent it back to the House of Representatives for the second time. I have pointed out before the tax and public finance implications of the US economy moving towards an $11.3 trillion dollar debt with the $700 billion rescue package. This debt amounts to $37,098 per US citizen.
Some have said that the US will recoup the $700 billion eventually by selling off real estate when things have settled down but that claim seems dubious given that the package targets specifically bad debts. Moreover, it is by no means clear that the package together with earlier measures (about $1.3 trillion in all) will resolve the underlying crisis. The US has overspent for a decade and is now faced with the prospect of borrowing more to forestall disaster. If the US were not such an important part of the global economy the answer would be easy - let the US experience an intense recession and let it begin to repay its debts both through increased personal savings and significantly higher taxes. I emphasise that this is an impractical immediate response but longer-term it must happen. The Senate, in fact, has only agreed to pass the bill with some further tax breaks.
The global implications of the US problems are being dramatically illustrated by events in Europe which some see as facing the prospects of a more intense recession than that anticipated in the US. France is seeking a 300 billion Euro rescue package for European Banks. It is already on the verge of recession. In an interesting twist Ireland has guaranteed all the bank deposits in its banks. This should boost confidence in Ireland - despite the fact that this vibrant Celtic economy is already in recession - but other European countries are complaining about the banking move because it is undermining confidence in their less than their fully guaranteed banks - customers are apparently shifting their deposits to Ireland!
The possibility of a really severe global contraction seems plausible and a global recession inevitable. Australia is exposed to these developments because of our open economy and our high levels of private debt.
The current situation is dire and I don't see straightforward solutions.