What’s The "True" Cost Of The $700B Bailout?

The dollar figures being tossed around with all of these financial “rescue packages” are staggering. A few dozen billion here, and few hundred billion there. Where is all this money coming from, and what are the costs of spending all this money?

Context

So far, the U.S. government has pledged to spend over $1.8 trillion to help stabilize the current financial crisis. That’s a BIG number. How big? $1.8 trillion is equal to:

• 75% of total 2007 U.S. government revenue
• 13% of total 2007 U.S. GDP
• $8,400 per U.S. worker

They’re going to spend the equivalent of 65% of the total cost to run the whole U.S. government for year, military and all, to bail out all these bone-headed financial institutions! Ouch…

And we likely haven’t seen the last of the bailouts yet either. None of the $1.8 trillion pledged so far helps the millions of homeowners who are facing foreclosure. Expect a trillion dollar homeowner bailout plan in the new year…

Currency

So where does all this money come from? Money doesn’t grow on trees, right? As I’ve been explaining to my son, money comes from helicopters…

One of the things that the U.S. government has been doing throughout this crisis is printing money. But printing money obviously has to come at a cost. In this case, the cost is devaluation of the currency; hence the declining U.S. dollar.

The effect is that each dollar becomes less valuable, and thus, each dollar has less purchasing power. So, even though U.S. wages have been basically flat this decade, they’re down significantly when compared to wages in other countries like Canada and members of the European Union because the currency has declined so much.

This is one of the reasons the cost of natural resources has appeared to have jumped significantly this decade. The cost of raw materials is increasing, but because oil and gold and other resources are measured in U.S. dollars, the price jump has been more significant. The result is inflation because everything appears to cost more to make, but in reality it’s as much about the fact that your money is worth less.

If printing money was the solution to financial problems, Zimbabwe would be the model financial system.

Debt

The other way the U.S. government can get money is by issuing bonds, but the government has to pay interest on these bonds every year until they’re repaid. The interest on current debt was about $239B in 2007, which is about 10% of government revenue, or $1,000 per U.S. worker per year, every year!

Issuing debt is essentially taxing your children. Not only do they have to pay the debt back, but they have to pay interest in the meantime. It’s essentially like everyone leaving $50,000 in debt to their children when they die rather than an inheritance.

I think Eric Sprott summed things up nicely when he said:

“Central banks cannot create wealth. Nor can they avoid losses. They can only convert one financial problem into another.”

Some are suggesting that these bailouts will be profitable for the government in the not-too-distant future. I’m not sure I believe it. I’d be surprised if the government got back more than a small fraction of this money.

In the end, I think we’ve been over-consuming with borrowed money for too long. At some point, we’re going to have to pay down our collective debts. That time appears to be now…

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