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Flowcharts of Paulson Plan

Flowcharts of Paulson Plan. Why it won’t work Steve Keen www.debtdeflation.com/blogs. Precis. This is just a very fast sketch of the probable feedback effects from the Paulson Plan, prepared to guide comments to a the Australian Channel Nine TV Today show

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Flowcharts of Paulson Plan

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  1. Flowcharts of Paulson Plan Why it won’t work Steve Keen www.debtdeflation.com/blogs

  2. Precis • This is just a very fast sketch of the probable feedback effects from the Paulson Plan, prepared to guide comments to a the Australian Channel Nine TV Today show • I used US$2 trillion as my ballpark, both because US$700 billion seemed just too small in the light of the scale of US private debt—US$25 trillion for households and business, and $41 trillion when financial sector debt is included—and because I expect the “Plan” to blow out over time anyway to much this level. • This analysis is a long way short of the type of dynamic modeling I prefer to do to consider the consequences of economic policies; • but with less than a day’s notice of the interview, it’s the best I could come up with. • Mind you, it doesn’t look too bad in the light of the “Say What?” comment posted on the Doonesbury site today (http://www.doonesbury.com/strip/dailydose): • “It's not based on any particular data point. We just wanted to choose a really large number.“—Treasury spokeswoman on the $700B bailout figure

  3. Issue $2 tn bn Gov Bonds Servicing cost 3% of 2tn= 60bn/ yr Principal of 2tn needed in 25 years say 40 bn/yr Sell 25 yr bonds at 3% 25% Income from RMBSs at 10%: 2 tn * 10% * 25%=50 bn/yr for 25 years Banks solvent but few borrowers… Buy RMBS from Banks etc. Public cash reserves fall $2 tn Reduction bank assets 10 bn/yr tax increase Owns RMBSs Public cash reserves restored in 25 years minus house repurchases Capital Recovery say 25% of 2tn = 500 bn over 10 years say 50 bn/yr Drop in capacity to pay debt down Repay bonds in 25 years Private debt reduction 10%/yr 1500 bn deficit at 10 yrs 60 bn/yr tax increase at 10 yrs for 25 yrs 70 bn/yr total tax increase 30% fall in aggregate demand Depression

  4. Print $2 tn cash 25% Income from RMBSs at 10%: 2 tn * 10% * 25%=50 bn/yr for 25 years .05/12 tn =.4% boost to aggregate demand Govt owns RMBSs Capital Recovery say 25% of 2tn = 500 bn over 10 years say 50 bn/yr Buy RMBS from Banks etc. 50% bank assets Banks solvent but few borrowers… 2 tn additional cash; say… 50% spend = 500 bn/ yr (optimistic circulation effect) .5/12 tn = 4% boost to aggregate demand 50% cash with public; say… 50% asset purchase; 500 bn Private debt still 30 tn+ Private debt reduction 10%/yr Reduction bank assets Plus 4.4% boost to aggregate demand 30% fall in aggregate demand Less severe Depression

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