I started writing this post on Sunday but never got a chance to finish it. (On the other hand my first 3 days of the UCLA MBA program have been AWESOME!) I  know there’s been a lot of commotion in the stock market over the past few days and the Government just announced a bail-out of insurance company AIG. (But between spending 12 hours at school and reading 40 pages of papers a night, its been impossible to keep up). So anyway, here’s my delayed posting – its still relevant.

Last week the government announced a bailout of Fannie Mae and Freddie Mac. The US taxpayer now owns 79.9% of the outstanding shares. Before you go around congratulating them on their outstanding stock picking skills, just remember that the government is now explicitly backing the mortgages held by the two institutions.

While certain government officials have said that the bailout will end up costing the taxpayer as much as $300 Billion, the actual figures could be as high as $1 Trillion. When you consider that several major banks, the FDIC (Federal Deposit Insurance Corporation) and the PBGC (Pension Benefit Guaranty Corporation) will all need to be bailed out at some point, the official cost to the US tax payer will probably be well over a $1 Trillion.

Where is the government going to get this kind of money? Our national debt is already running at $9.68 Trillion and we have future debt obligation of another $45 Trillion.

Will the government raise taxes or just print more money to cover this shortfall?

Raising taxes is never a popular thing to do and most politicians try to avoid it if they can. The easiest thing to do is just print more money! However, this has the effect of devaluing the existing dollars in circulation. This typically leads to more inflation. Someone even said that inflation was like taxation without representation!

Basically, the average US tax payer is on the hook for all these bailouts. It will come at the cost of higher taxation, or higher inflation. Both will lead to a somewhat lower standard of living than we’ve been used to for the past two generations!

Despite the severe correction in gold and silver prices, this instability in the currency should cause their prices to jump.Even gold and silver stocks, which have been massively punished, should do well in the long term and are currently great buys right now.