Vitaliy Katsenelson wrote a good article for Forbes today about the impact that a $700 billion bailout would have on confidence in the US dollar.
Excerpt:
“In the past, we did not really have to worry about the financial strength of the U.S. government. Today, that financial strength has been tested. I doubt it will happen but I would not be surprised if Microsoft’s new AAA-rated bonds will have a lower yield than US Treasuries.“
In other words, if the US government commits to a $700 billion bailout plan investors know that they will have to effectively print money to foot the bill. Increasing the money supply would lead to higher inflation and therefore higher interest rates.
Although unlikely could you imagine if US debt carried higher rates of interest than AAA corporate debt?
However, he goes on to mention:
“On the bright side, the bailout may or may not end up being a bailout. If the government were to buy loans for 30 cents on the dollar that are worth at least 30 cents, then the government is providing liquidity–the cost to taxpayers is zero. Not necessarily a bailout.”
Hopefully the latter is the case.