“Don’t worry; they’ll bail them out.”

I'm saying those words a couple of times a day now, every time my clients call and ask if I think their auto insurance policy with AIG (AIG) or their money market fund will be around tomorrow, or if their CDs will be made whole if the FDIC goes bankrupt. Though I love putting my clients at ease, there are consequences to the bailout:
 

• Inflation: At some point, the government won't be able to afford to keep bailing our financial (and other, real) companies out, and will have to start printing money. Though it's hard to have inflation while the financial industry is deleveraging, when credit normalizes, we'll be hit with massive inflation.
  
  
• Weaker dollar: Give me a just one-armed economist, demanded President Truman. I feel his pain. That's how I feel when I talk about the US dollar. Only last week, I thought the odds were that the US dollar will embark on the appreciation journey against other currencies.
  
  After the bailout announcement, the prospects are a lot less clear. The US government possibly starting a gigantic printing press isn't good for the greenback. However, currency strength/weakness is driven by relative, not absolute, economic performance. This where “the other hand” comes in, maybe foreign governments’ printing press will be even bigger than ours? We don’t know. So prepare for both.
  
  
• Higher interest rates. In the past, we didn't have to worry about the financial strength of the US government, but today the government’s financial strength has been tested. Though I doubt it will happen, I would not be surprised if Microsoft’s (MSFT)new AAA-rated bonds will have a lower yield than US Treasuries.