Thoughts on U.S $700 Billion Bailout Plan

With so much focus on the bailout plan recently, I figured I will also start my own discussion on the bailout plan’s effect on the economy and the financial markets. With so much going on in the headlines recently, there is only one certainty and that is volatility in all markets. Whether we are looking at stock markets, currency markets or commodities, intraday fluctuations are scary yet potentially rewarding for those who play it right. I have heard traders complaining of getting whipsawed out of the markets too easily in these markets, but I’m sure that there are still a few masters of the trade laughing to the bank.

Anyway, the effects of this bailout plan seems to be positive at surface, helping to bring financial institutions out of distress and these institutions can go ahead and carry out business like before. However, there are a few worrying factors that we ought to observe and one of them is the psychological impact on Wall Street and general citizens. Even the less financially savvy folks have heard of recent news and are even skeptical of putting their money into insurance companies. For investors who have been burned investing in the markets, they may be unwilling to enter the markets ever again or at least for a long period of time.

On a institution level, banks may become more conservative than necessary, therefore limiting the growth of businesses. Of course, this impact is almost impossible to measure, so let’s assume that we do not suffer from any psychological anomalies as a result of recent events. Does that mean that we are all safe and set for growth like the previous years?

Personally, I do not really think so, since I think that the bailout plan places U.S at such a large deficit that they are in a dangerous level of debt. I can’t imagine what will happen if some country decides to pull their funds out of U.S and other countries follow suit. Judging by current situations of flight to safety, this is a very real possibility. U.S currency carries a high risk of devaluation if we look at how the currency had depreciated in just the past few months alone. Adding to the fact that their current debt is so high (estimated at $11.3 Trillion) after the bailout plan, the potential for further devaluation is virtually limitless.

I read an article from Bloomberg and China claims that it’s doing a favour to U.S by keeping their funds there. I have to agree with this statement judging by current situations, but that article stated that China wants some reassurance that the currency is safe. Countries need to agree to hold U.S assets to prevent the dollar from dropping further, but when will these favour ends? Will there be a time when countries feel that keeping their money in U.S is far too dangerous and decide to pull out?

If the time really does come, what will happen to the rest of the world’s economy and financial markets? I don’t even wish to imagine.