Every solution has a cost, says Bill Bonner. And trying to solve this credit crisis could cost the government over $2 trillion a year. That why when the Fed says is it “going for broke” to avoid all-out financial collapse, it really means it.

This from The Daily Reckoning:

It’s war, remember. The feds are spending more on this war than on WWII. They’re ‘pulling out all the stops.’ They’re ‘throwing caution to the wind.’ They’re ‘riding hell for leather’ to rescue the US economy. Getting in their way is dangerous.

Investors should check their shorts. A major rally could be very costly. Stocks could easily bounce back half way to where they began. That would put the Dow at about 11,000. If that happens – and it could – don’t forget to sell.

It says in this [Monday] morning’s International Herald Tribune that the feds are “going for broke” to avoid a “financial collapse.” Yes, exactly…that is where they are going.

Bloomberg came up with its count of how much the war against nature is costing: $7.4 trillion…with $2.8 trillion already committed. We reported a figure over $8 trillion yesterday. By the end of this week, it will probably be $10 trillion.

Any way you look at it, it’s a big number. It has to be. According to the theory given to us by Keynes, the government has to make up for the spending private citizens are no longer doing. Americans used to ‘take out’ as much as $200 billion per quarter from their home equity. Now, they have nothing to take out. So, that’s $800 billion per year that needs to be replaced right there. And, instead of taking out, they have to put back in…that’s what a ‘balance sheet recession’ is all about. They have to pay off debt and build up savings.

Our own guess is that that figure – the amount that used to be spent, but must now be used to repair finances - will rise to about 10% of GDP – or about $1.4 trillion per year. In other words, the feds will have to spend an extra $2.2 trillion per year.

For comparison and reference, the Times is reporting a $1 trillion figure. And economists argue that $750 billion of federal spending would achieve the equivalent of $1 trillion in additional output, thanks to the ‘multiplier effect.’

But today’s Times’ editorial goes on to say something uncharacteristically smart: “fighting today’s crises the government is teeing up the next one. To finance the bailouts, the Treasury is borrowing money and the Fed is printing it. That bodes ill for a heavily indebted nation, presaging higher interest rates and higher prices – perhaps sharply higher.”

Let us remind you of Tainter’s simple explanation for why things fall apart. Problems bring solutions. Solutions bring more problems. And each solution has a cost. Eventually, the weight of all the solutions crushes the system.

Source: Going For Broke