$700 Billion is Not That Much

I admit to having ranted about the bailout and, in doing so, tossed around the number $700 billion like it is a really big number. And it is. It is more money than I have - roughly $700 billion more! But a few thoughts to put this in perspective:

• $700 billion is about 5% of GDP, at least by last year's numbers. That's not that expensive; the average banking system collapse usually costs a country 13-16% of GDP, depending on whose research you look at, and sometimes a lot more.
• The worse things get, the cheaper it becomes for us to bail banks out. This is the perverse nature of the world economy; because US Government debt is still considered the safest of the safe, every time the news gets worse (requiring more bailout money) the financing our government pays on bailout money gets even cheaper.
  

At one point the real return on T-bills went to zero - that is, people would loan the US government money for nothing! At that rate, we can afford to bailout the titanic with a bucket.

The scenario that scared me most about a year ago was that we would hit this crisis and a dollar crisis at the same time, and the fall of the dollar would make government financing very expensive. But that hasn't happened; this graph shows the Euro falling relative to the US dollar as things get worse. As much as people are worried that the US is in for some pain, they are more worried that Europe won't be able to apply the right medicine.

To quote Alex Bloomberg from "This American Life", the worse the US Government does, the more people want to loan us money. It's a strange, strange, strange world.