If I read you right, my inner Summers is my inner optimist, my inner faith in debt. If so, is Summers not using government debt to rebuild the very debt-financed house of cards that just collapsed?

And this time, given modern advertising’s power to dispel the pain of past financial crises and to fuel the human drive for acquisition, might not the rebuilt house of cards swell to a topheavy size where it too collapses by 2020 or even 2015 just as it collapsed in 2008?

I’m glad your inner Summers has the decency to acknowledge that “there are those who had prognosticated a calamity of this type.” My favorite prognostication is Michael Hudson’s “The New Road to Serfdom: An Illustrated Guide to the Coming Real Estate Collapse,” the Harper’s Magazine cover story for May, 2006 at http://www.insurgentamerican.net/download/MichaelHudson/Hudson_RoadToSerfdom.pdf

I perhaps naively feel some bondholders aint suffered enough, as they rightly should cos no-one promised they would be bulletproof when they bought the bonds, but maybe they’re too powerful.

At the risk of looking really stupid (again, but I’m used to it), no-one’s yet told me why it would be a bad idea if the Central Banks of the world said tomorrow that they were” minded” to buy gold and the IMF cancelled their proposed sale. Just the implication that the CBs might do this would surely set a torch under delayed global spending plans of all those still in employment and not overloaded with debt, as they sought to get out of what would surely be perceived as the declining asset of most global currencies. This would give a fillip to the global economy and buy a bit of time for the rubbish assets to get worked-off.

So Ed – please tell me why this is a silly idea – I’m an adult and I can take it!

@stevie b, thanks for the compliment and I agree that the debt is going to be a problem. Question for you, though. What is the alternative from your perspective?

Assumption #6 means they believe that there is a fixed amount of bailout needed and is is likely low. This would mean we are nearly at the end of the bailout phase. This does seem to be in line with Geithner and Summer’s current strategy moves. The stress test “revealed” that a few banks need a “bit more” bailout money and then we’re Jake.

I also completely agree that these folks do not have a plan B (or at least a plan B they think might really be necessary – hence is not taken seriously). So what would the outcome be if the banks suddenly need a massive amount of additional capital? The belief system you outline above, which does ring true as far as I can see, means that their only move is to dump more capital into the large banks while continuing to close and consolidate the failing regional and local ones. And once they realize that another 1.5 trillion dollars or more is still needed, which most of us with a clue could tell you is as plain as Bill Clinton’s nose, they hit a pretty massive roadblock.

If an already 1.5 trillion dollar insolvency caused world markets to lose 40% of their value, what will a follow on need of equal or greater intensity do? What will it do to treasury auctions? What about consumer confidence? The answers to these questions in light of the assumptions and constraints the GS/gov crowd is playing with leads me to the conclusion that we will be dealing with a plan B where an additional 1.5 trillion dollars is shoveled in through the back door with no transparency or public scrutiny. So much for Obama’s open and transparent government!

If we who see the hole of insolvency are right – and accelerating prime & commercial defaults say clearly that we are – there is no way to fix the banks without another massive round of cash injections. Since to do this publicly would be self-defeating I believe they will do this with the curtains drawn.

“Don’t pay attention to the man behind the curtain. Pay him no mind.” Ala the Wizard of Oz.

The mantra and strategy of looming “plan B” in my not so humble opinion.

Totally agree with your drift that not only have we been living in a fools paradise for at least 15 years, but we also need to recognise that the world is going to become a more level playing-field with living standards evening-out more over the coming decades – which IMO means relative decline for the West. Piling up unknown, unending amounts of debt under this scenario is a recipe for a very messy ending indeed.