Bailout Cost: $8.5 Trillion so far ... and Counting

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

One analysis has calculated that so far the bailout efforts of the U.S. government are up to $8.5 trillion. This is almost as much as the U.S. National Debt was when the bailout efforts began. So basically in a year the U.S. government has managed to double a debt level than took well over 200 years to accumulate. Don't expect to see all of these bailout costs included in the official National Debt figures however since the U.S. government engages in more off-balance sheet accounting than Enron ever dreamed of.

While these figures would seem alarming to even a casual observer, many mainstream economists don't find them troubling. Recent Nobel winner Paul Krugman claims the U.S. National Debt could be twice GDP (which would be around $28 trillion if you believe the official overstated GDP figures). How this could be a sustainable debt load for the U.S is hard to fathom, especially since we have a huge stream of social security and medicaid payments coming due in the next couple of decades because of retiring Baby Boomers (there is no money in either of these trust funds by the way, all the funds are used to support current government spending the moment they are received). Economists are also not worrying because over 50% of the bailout costs so far have been structured in the form of a loan. Much of those loans are backed by the truly worthless assets though - apparently the hope that sub-prime borrowers (this time companies) will by some magic pay back their loans still lives on and on in the fantasy land of modern economic belief. While up to now over 95% of bailout costs have been in the form of corporate welfare, expect this to change starting next year with a shift toward more support for individuals.

Although the inflation implications of U.S. government bailout profligacy should be ratcheting government bond yields to record levels, this has not happened yet. A flight to safety among desperate investors had kept U.S. bond yields unusually low (corporate bond yields are at a record spread to treasuries however). The drop in yields combined with the plunge in U.S. stocks has actually caused S&P 500 yields to be greater than 10-year U.S. Treasuries for the first time since 1958. Before that date this relationship was the norm. Don't assume that norm is returning however as some pundits are claiming. Stock yields are being kept artificially high by the bailout programs, which have allowed some companies to fund their dividends with U.S. taxpayer money. Stock dividends are going to come down and U.S. bond yields will eventually go up when they adjust to the inflationary realities of government spending.

Meanwhile, the bailout programs are not nearly at an end yet. As we have said in the New York Investing meetup since the credit crisis began, there is no such thing as one bailout for an insolvent financial firm. No firm has been better than Citigroup in proving this point. After five private bailouts earlier in the year, Citi got $25 billion from TARP and only weeks later had to have a much bigger government cash infusion to stay afloat. The auto makers are in Washington hat in hand at the moment with a low entry level bailout request - expect those costs to keep going up next year as well. And of course, their are more bailouts waiting in the wings.

NEXT: Economic Predictions for 2009

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.