In broad strokes, as I understand the financial crisis, financial institutions are in trouble because they are over-leveraged and their customers took on too much debt -- and are increasingly unable to pay back their loans. As defaults rise, financial institutions have become increasing reluctant to make loans, even to each other for fear of not being repaid.
The proposed cure to this mess is for the various Western governments to inject massive amounts of money into the financial system. Of course, the governments involved don’t actually have this money . . . they will have to borrow it from the folks (citizens) who couldn’t pay their own bills in the first place. Hmmmm . . . interesting if it works.
Assuming we can all collectively borrow ourselves out of debt, what effect will this massive borrowing by the various governments have on the cost of borrowed money? As demand rises, am I correct to assume that we can expect to see the cost of money increase? Does this mean that I can expect a higher yield on Government bonds that I purchase in the future?
