AT WHAT COST?

Let's review the cost of the massive federal government effort to revive (save?) the economy. First is the TARP plan adopted last fall at a cost of $700 billion. Now we have the Obama Stimulus Plan with a $789 billion price tag. The new Financial Stability Plan speaks of spending up to $1 trillion to buy up undervalued assets. This adds up to maybe a total cost of some $2.5 trillion, a sum equal to one-sixth of the US GDP (total output for the year) or just short of the current federal government budget.

Next let us remember that all of this cost will be paid from borrowed funds, not current income. In other words Uncle Sam's famous "national debt" will increase by maybe $2.5 trillion. The national debt now stands at some $11 trillion which is equal to 75% of the GDP.

What's that you say? We will burden our children, grandchildren, in fact our entire lineage with debt. Guess what, the United States of America has been in debt since the day it was born. In 1791 US Government debt amounted to some $75 million. We usually measure the size of the national debt against our national income. The highest point reached on this scale was at the end of the Second World War when US debt was equal to 120% of GDP. The USA has always been in debt, and will continue to be so for the duration of the Republic.

Back to the recovery plan cost. Uncle Sam will borrow up to $2.5 trillion. But at present the cost of this borrowing is relatively small, maybe 1% interest per year. This is because everyone is putting his funds into Treasury Bills that are considered as "good as cash" since they are backed by the Republic itself, just like the bucks in your pocket. So the actual cost of the borrowing will be $25 billion per year, a very small cut from the Federal budget for 2009 of over $3 trillion.

Let me make it perfectly clear, the cost of the recovery effort will be relatively small, less than 1% of the federal budget per year. I would suggest that the Obama team highlight this fact when it makes its pitch for public support.

As interesting as this may be it does not reveal the truly fascinating aspect of this process. As I have been saying for the last six months Uncle Sam is buying up the private sector at little or no cost. It took the Bolsheviks a sea of blood to do this in Russia. Uncle Sam is doing it for peanuts.

I can hear the chorus now, "socialism." Well if this be "socialism," so be it. The private sector has withdrawn from the battlefield leaving Uncle Sam to soldier on alone. Yes, the Financial Stability Plan calls for joining private with public funds to buy up undervalued assets. But I fear that the private sector will put few funds into this plan. Private investors ain't doing it now, so why expect them to do so in the future?

Where does it all end? I repeat that this is fascinating stuff. We are in the midst of creating a "New Economy" and no one really knows what the final product will be. Stick with me on this amazing journey.

Leo Cecchini
February, 2009