December 10, 2008

The Bailout Total: $8.5 trillion-- Inflation To Come

By Julian Dunraven, J.D., M.P.A.

Honorable Friends:

In prior posts, I have made my disdain for the economic bailouts abundantly clear. Thus, I have not been at all surprised that the bailouts have failed so miserably to solve the financial crisis over these past several weeks of extreme volatility. What has surprised me a bit is the amount of money the government is willing to gamble in a desperate attempt to force the bailouts to work.

“Helicopter” Ben Bernanke, earned his moniker by once promising to drop helicopter loads of money on to a financial crisis if needed. This was the lesson he gleaned from years spent studying the Great Depression of the 1930s. Mr. Bernanke determined that had we simply thrown enough money at it, we could have ended the Great Depression much earlier. The Austrian School would say that he is exactly wrong, but he is now putting his theory to the test in our current financial crisis. As the helicopters continue to swarm, I think it only prudent that we occasionally glance at how much we are spending to test his theory. Jim Puplava, investment advisor and CEO of Puplava Financial Services, Inc., has provided a quick accounting of the helicopter drops and so far:

· For commercial paper, we have allocated $1.8 trillion;
· The Term Auction Facility, which provides negotiated rate for banks to borrow from the FED, has allocated $900 billion;
· Other assets have $606 billion;
· Finance company debt purchases, like the Fannie and Freddie bailouts, have received $600 billion;
· Money Market Facilities have $540 billion;
· The Citigroup bailout cost $291 billion;
· Term Security Lending has $250 billion;
· Term Asset Backed Loan Facilities (TALF), designed to help credit cards and business loans, has $200 billion;
· The bailout for AIG cost us $123 billion;
· Discount Window Borrowings has been allocated $92 billion;
· Commercial Program Number 2, which helps banks buy commercial paper from mutual funds, received $62 billion;
· Discount Window Number 2 has $50 billion;
· The Bear Stearns bailout cost $29 billion;
· Overnight loans have received $10 billion;
· Secondary credit is at $118 billion;
· Federal Deposit Insurance Commitments (FDIC) which guarantees loans, has received $1.4 trillion;
· Guarantees on GE Capital are at $139 billion;
· Citigroup’s second bailout took another $10 billion infusion;
· The Troubled Assets Relief Program (TARP) we heard so much about has $700 billion;
· The earlier stimulus package this year cost $168 billion;
· Treasury Exchange Stabilization Fund took $50 billion;
· Tax breaks for banks are at $29 billion;
· And Hope for Homeowners devoured $300 billion

Thus, the total amount we are spending on the bailout so far is $8.5 trillion.

Early next year, we can look forward to another $700 billion bailout directly to the people (which will include even those who do not pay taxes) as promised by Obama and Pelosi. There will also be some form of bailout to the Detroit automakers, and the bailout for the various states is still to come as California has already begun to issue IOUs. For more detailed information, check out Mr. Puplava’s Financial Sense Newshour, “The Big Picture” for December 6, 2008.

Currently, our GDP is only $10-13 trillion depending on how generously you want to calculate it. Either way, spending 60-80% of our GDP on bailouts should outrage you. So where is this unimaginably vast amount of money coming from? As I have said before, we are simply printing most of it. As you might imagine, such frantic money printing should massively increase inflation. Just examine the money base chart below.

This massive increase has not yet hit the money supply (See chart of M2 below) as the banks are busy trying to recapitalize and deleverage rather than giving out new loans. We used to call that prudent, but prudence is not what our government wants right now. Many of the above programs have been created to allow the government to bypass the banks, injecting cash directly into the economy in an attempt to spur spending, create new bubbles, and stagger along to the next distortion created crash. If it doesn’t work, we can look forward to a large devaluation of the dollar.

This impending inflation and devaluation should explain why investors like Warren Buffett have gone to equities and totally divested themselves of the dollar. Yet, even faced with this evidence, people are still flocking to treasury bonds despite the abysmally low or even negative returns on them right now. A wiser investor would seek stocks of companies which consistently pay dividends, have increased their dividends, and are likely to continue doing so. The precious metals also continue to look appealing as a hedge against the inflation our inept government is trying to ram down our throats.

With the election behind us, countering the political forces pushing the bailout—and the resulting inflation—has become much more difficult, but remains vitally important. Making our own displeasure with these bailouts known and holding politicians accountable for their actions are the only defenses we have against the continued financial mismanagement coming from our government.


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