Monday, November 24, 2008

7.4 Trillion Is Not That Much

In a past post I suggested that $700 billion is not that big of a number when compared to the usual cost of bail-outs relative to GDP.

People are now suggesting that we're at $7 trillion +.  That's a big number, but I think it's a "nominal" number, like when people talk about $47 trillion of derivatives.*  Bloomberg has this nice interactive chart showing who has committed what.

Now 7 trillion is a big number, but a lot of that money isn't going to actually get spent.  For example, 4.4 trillion comes from the Federal Reserve, which is guaranteeing low-risk things like commercial paper and money market funds that aren't really at risk in the first place.  To understand how much of this money we might really lose, we need to look at:
  • Panic money: investors are so freaked out that they don't even think the sky is blue is earmarked in the unlikely event that the sky is green and investors calm down.  Since the sky is in fact not green, I don't think we have to worry about this money going anywhere.
  • Screw-up money: companies made really bad investments, and Uncle Sam is guaranteeing them to prop the institution up.  This is where we could really get in trouble, but no one really knows by how much.  Most of this spending is under Treasury, bailing out CitiGroup, AIG, Fanny Mae, etc.
Even if we ignore the panic money and only look at screw-up money, it's still a lot.  As a final thought on this: we have an immovable object (massive spending) pushing the dollar down and an irresistible force (fear) pushing the dollar up (via a flight-to-safety).  I suspect that when the dust settles, we'll lose our fear but still owe a few trillion in bail-outs, and that's going to make for a rough time for the dollar.

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