Bailout Related Debt Could Reach $1.5 Trillion

by: Andy So

The U.S. is currently racking up a massive amount of new debt. Here is the current tally taken by Alex Patelis, an economist at Merrill Lynch:

Treasury buying mortgage-related assets: $700bn
Potential supplementary stimulus package favoured by Democrats: $100bn
Insuring money market funds: $50bn
Treasury fortifying the Fed’s balance sheet: $100bn
Expansion of temporary swap lines with central banks: $180bn
Loan to AIG: $85bn
Fed purchase of agency discount notes & ABCP: amount not specified
Fed loans through the Primary Dealer Credit Facility: $20bn through Sep 17
Fed’s discount window: $33bn balance
Treasury purchase of GSE MBS this month: $10bn
Potential cost of Fannie/Freddie bailout: $200-$300bn

The grand total of the above list is roughly $1.5 Trillion USD and I’m sure the U.S. isn’t done yet. If the government were to completely bailout Fannie Mae (FNM) and Freddie Mac (FRE), the resulting bill would amount to $5.2 Trillion or double our national debt. My guess is that the total cost of the government bailouts, if a $700 billion package to purchase mortgage backed assets is approved, will run close to $2 Trillion before the end of 2008.

In regards to the subsequent inflation from printing all this new money, Monty Guild of says:


Not for the next few months, but in coming years, inflation will be a big problem…and we had all better prepare for it. You may be getting tired of hearing us beat this same old drum but if you prepare for the next problem before it arrives, you will be much more financially secure.

The only solution for the current crisis is to liquefy the global economic system and liquefy it to an extreme never before experienced. You think that the mortgage bubble was a big one? Wait until you see the next bubbles.

The U.S., Europe, Australia, Japan, Canada, and others will all join the parade to fiscal and monetary irresponsibility by inflating their money supplies and creating our next big investment opportunity.”

All this new money entering the system to “fix” previous problems will lead to new bubbles and massive inflation. This is a formula that has been repeated in nearly every modern economic crises. Low interest rates and a “fix” of printing new money has lead to bubbles in the past. Look at how we moved from a tech bubble collapse to the problems we face with the credit bubble. I’m not sure how we are fixing a problem by covering it up in the same manner.