Monday, January 19, 2009

Musings on Trillions

Just what is a trillion? It's a million million. That's 1012 or 1,000,000,000,000.

fr0m Trillion-Dollar Spree is Road to Ruin, Not Rally
by Kevin Hassett

The Congressional Budget Office last week forecasted that the 2009 federal budget deficit will be about $1.2 trillion, roughly triple what it was in 2008... If the stimulus bill passes, the deficit next year will be $1.7 trillion...

The whole world’s military spending in 2006 totaled a little less than $1.2 trillion. So next year’s U.S. deficit could cover that and still have $500 billion left over for building bridges...

When President George W. Bush was first elected, total federal government spending was about $1.7 trillion. In other words, the difference between federal outlays and federal revenue this year will be bigger than the entire government was as recently as 2000.

In last Sunday's Washington Post, Greg Ip gives a few more startling figures:

At the end of the last fiscal year, in September, the total public debt held by the American people (excluding debt issued to the Social Security Trust Fund or held by the Federal Reserve) stood at $5.8 trillion, or 41 percent of gross domestic product -- about what the debt-to-GDP ratio has averaged since 1956. But the Congressional Budget Office projects deficits of $1.9 trillion over the next two years. Add almost $800 billion of stimulus spending, and U.S. debt soars to 60 percent of GDP by 2010 -- the highest level since the early 1950s, when the nation was working off its World War II and Korean War debts.

The other major cause for concern is that the federal government has taken on massive "contingent liabilities" -- loans and guarantees that don't become actual costs until the borrower defaults and the federal guarantee has to be honored...Bianco Research, a Chicago financial research firm, puts the total of such contingent liabilities (as of Dec. 29) at more than $8 trillion.

According to Howie Rich 2008:Year of the Bailout, on 01/08/2009, the government may have committed itself to $10 trillion thus far :

And while there is some confusion as to the current price tag of this growing “Bailout Mania,” we know that over the past sixteen weeks the U.S. government has poured nearly $10 trillion dollars into “correcting” the market.

You heard that right - $10 trillion dollars.

What about the $2 trillion in FDIC assurances, $1.75 trillion in Federal Reserve commercial paper purchases, $900 billion in term auction facility lending, $600 billion to insure money market funds, $600 billion to cover Fannie and Freddie’s worthless mortgage-backed securities, $550 billion for discount Federal Reserve loans, $500 billion to insure FDIC deposits, $300 billion for FHA mortgage relief, $250 billion for Citigroup debt, $225 billion for securities loan facility lending, $200 billion for Fannie and Freddie’s debt, $112 billion for A.I.G., and on down the line.

Add all those numbers up and you’re dealing with more than twice the inflation-adjusted cost of rebuilding post-World War II Germany, the Louisiana Purchase, NASA’s entire budget (since its inception), the S&L bailouts, Roosevelt’s New Deal, the Korean War, the Vietnam War, the Gulf War, and the Iraq War – combined...

With only a fraction of the total bailout tab on the books, our national debt has already soared to more than $10.7 trillion dollars.

That’s an astounding 72.5 percent of our gross domestic product (GDP).

Eight years ago, the debt was $5.6 trillion, or 58 percent of our GDP.

Just where is all of this money coming from?

One explanation can be found on Smart Money: Fed's Balance Sheet is Ballooning Fast. Luskin correctly compares all this money creation to counterfeiting, but then he backs off and says it's needed to stave off deflation. Oh well, I still like his graph.

Another (better) explanation of what the Fed and Treasury have been up to these past few months is provided by Axel Merk in "Monetizing the Debt." He explains it better than I ever could so if you are interested, you will just have to read it for yourself. Anyone else come across a good explanation?

Update 1-23-09 An excellent set of posts on this topic can be found at The Rational Capitalist. He refers to a couple of posts at Econbrowser (and an update here) which go into the details of just how the Fed and the Treasury are attempting to create money now while delaying the inevitable inflation.



Kendall J said...

Great post Beth,

TARP just scratches the surface of what the FED is doing. GLad someone is keeping track. Now I just wish they'd back off. The medicine is going to be worse than the "deflation sniffles" that they're trying to cure us of.

Burgess Laughlin said...

> "Another (better) explanation of what the Fed and Treasury have been up to these past few months is provided by Axel Merk . . ."

I am not an economist. After reading quickly through the Merk account of the activities of the Federal Reserve System, two evaluations come to mind for the situation Merk describes: "Rube Goldberg" and "house of cards."

In a sense, isn't the situation the Federal Reserve is in actually a small-scale version of what happens to a whole economy under full socialism (as I remember it described in Ludwig von Mises's work, Socialism). Every step has destructive consequences in an increasingly elaborate and artificial system, and the response to each destructive consequence is more economic manipulation by government and so on.

If followed consistently, such actions can lead only to a crack-up of the economy.

softwareNerd said...

The "monetization of debt" is Merk's (accurate) description of what is to come, rather than what has transpired so far.

Upto this point the rise in the Fed's balance sheet has come from two sources:

* the first source is the so-called "printing" of money. The Fed simply creates an accounting entry telling banks and others that they have the money. The technical term for it is "abracadabra" ;)

* the second source of funds has been people who are buying government bonds from the Fed. This process is the opposite of "monetization of the debt". It's the "sterilization" that Merk shows on his first graph. We can see that about half comes from this and the rest from money-creation.

[It is "sterilization" in the sense that the Fed is creating 1.2 trillion of abracadabra money, but then sterilizing the excessive money creation by selling government bonds and thus reducing some of the money-supply increase.]

Doug Reich said...

Hi Beth,

Great post.

I blogged about this and posted a link to a good site (econbrowser) that explains the Fed's balance sheet explosion rather nicely. My post with links to econbrowser posts is here:

Michael Labeit said...

Sobering and gut wretching.

Beth said...

I'd forgotten about your excellent posts and the 2 by EconBrowswer. I will update my post to refer readers to them. Thanks for the reminder.