Mortgaging America

Folks, do you truly understand the amount of money the Federal Government is promising to spend to deal with the current financial crisis? We are in uncharted territory and the traditional notion of a private sector is dead. While we still claim to believe in the notion of private property, the fact of the matter is that the Federal Government is now promising to spend 7.7 TRILLION DOLLARS:

The U.S. government is prepared to provide more than $7.76 trillion on behalf of American taxpayers after guaranteeing $306 billion of Citigroup Inc. debt yesterday. The pledges, amounting to half the value of everything produced in the nation last year, are intended to rescue the financial system after the credit markets seized up 15 months ago.

The unprecedented pledge of funds includes $3.18 trillion already tapped by financial institutions in the biggest response to an economic emergency since the New Deal of the 1930s, according to data compiled by Bloomberg. The commitment dwarfs the plan approved by lawmakers, the Treasury Department’s $700 billion Troubled Asset Relief Program. Federal Reserve lending last week was 1,900 times the weekly average for the three years before the crisis.

Let’s put this sum into perspective. For starters, the U.S. Gross Domestic Product aka GDP is a little more than $14 TRILLION.

Gross domestic product (GDP) is defined as:

the market value of goods and services produced by labor and property in the United States, regardless of nationality; (GDP replaced gross national product (GNP) as the primary measure of U.S. production in 1991).

Got it? The Federal Government is going to spend more than 50% of all of the goods and services produced in the United States.

There is another way to look at it. If you divide 7.7 trillion by 300 million (the approximate population of the United States) you get the magic number–$25,666.67. That is how much money every man, woman, and child in the United States is paying for this bailout.

Now, where is that money going? No one knows. It would be one thing if the Federal Government decided to send every person in the country a check of $25,000. Man, wouldn’t that be sweet. That would cover a lot of mortgages. But the Feds are not doing that. It is going to financial institutions and ultimately into the pockets of well paid, connected financial managers, brokers, and customers.

But where is the Federal Government getting this money? It is not sitting around in the vaults at Fort Knox. The Federal Government is borrowing this money. That means someone, somewhere is agreeing to lend us money but they want to be paid for it. So we are not just talking 7.7 trillion. There will be interest paid out on that as well.

Let’s look at this from a personal perspective. Let’s assume you have a traditional Ozzie and Harriet nuclear family–Dad, Mom, Joey, and Jill. Let’s assume you make $100,000 a year and that everyone in the household lives off of that sum. After you buy food, gas for the car, pay for the utilities, get the necessary clothes and shoes, how much money is left over? Whoops, forgot that you don’t really have a full $100,000. $25,000 of that goes to the Federal Government for taxes and social security. And we have not even calculated State and local taxes. Let’s assume that’s another $10,000.

So, instead of $100,000 you actually have $65,000 (100,000 minus 35,000). If your annual expenses (food, gas, clothes, etc) are $45,000 you have $20,000 walking around money (the technical term is, “discretionary income”). With this amount of money you could afford to pay roughly $2000 a month for a mortgage payment. That means you are carrying a mortgage of about $250,000 at an interest rate of 6.5%.

Under this scenario you don’t have a lot of money to do anything else other than live. Are we tracking?

Now let’s explain what the Federal Government is doing in these terms. The Federal Government’s annual income comes from taxes it collects from a whole host of sources. But then it takes that income and spends it on the salaries of government employees, buys defense weapon systems, and pays for social security and medicare. It also has to pay back the money it has borrowed (or at least pay the interest on what it has borrowed).

So on top of all of the existing expenses, the Federal Government is now borrowing more than 50% of all of the money it is planning to take in. That means one simple thing–the Federal Government is now acting like one of the low income borrowers who bought a house they could not afford. That is the foundation of the current collapse. And the Federal Government’s solution? Borrow more money than it can afford to repay.

We are postponing judgment day. But some point in the future, 3 to 5 years out, the amount of money we have borrowed will show up in our economy as inflation. Prices will start rising dramatically. Interests rates to borrow money will go thru the roof. And that will bring economic activity to a grinding halt.

Personally, I think we would have been better off just borrowing the money to pay off the mortgages. At least people would be able to own their own homes and then have some disposable income to use for buying a GM or a Ford.