$4.2845 trillion. Even Bill Gates and Warren Buffett would agree; that is a very big number.
According to CNBC, this is the amount of actual spending
and commitments of the combined Federal Reserve and Congressional stimulus and stabilization measures as of last week. Among some of the larger components (in billions): Federal Reserve Term Auction Facility $900; American International Group, AIG, $125; Federal Housing Administration, FHA, $300; Treasury Asset Relief Program, $700 and growing.
The number grows larger if we are to include monetary infusions related to lower interest rates, tax rebates, expanded unemployment benefits, liberalized depreciation schedules and other measures that involve more subjective quantification.
And more is coming.
Just the other day the Federal Deposit Insurance Corporation, FDIC, announced it will guarantee up to $1.4 trillion of banks' debt for three years. President-elect Barack Obama says there will be at least one more economic stimulus package ($175 billion or more) when the new administration takes office. Some think the Fed will cut interest rates even more during its Dec. 15-16 Federal Open Market Committee meeting.
Putting the number into perspective
The amount of monetary infusions already enacted is simply astounding.
It is larger than the inflation-adjusted cost of World War II ($3.9 trillion).
It is more than eight times the inflation-adjusted amount of the New Deal and Second New Deal that brought the U.S. out of the 1930s Great Depression.
It is enough to buy every person in the U.S. a Big Mac every day for 38 years.
And the number represents just U.S. infusions. Remember, this economic problem is not just an American problem; it has become a global problem. The total amount of international monetary infusions (non-U.S.) is probably even larger than the U.S. amount of more than $4 trillion.
Monetary infusions increase money supply. Monetary infusions have their own histories. The circumstances or events that led to the need for infusions usually were funding wars and/or reversing economic slowdowns. Whatever the objectives, in civilized economies, the money supply (infusions) is increased until the objectives are achieved.
We believe one of the core objectives of this historic set of infusions is to stem deflation. As clearly evidenced, central banks and governments will pump, pump, pump and print, print, print until sufficient new money is infused and the objective is achieved.
In civilized economies, (this eliminates Zimbabwe, where the annual inflation rate is now 218 million percent - not a misprint) other than those on the "wrong side of wars," the monetary infusions invariably have achieved their objectives. This was and is possible because there is no limit to the amount of new money (money supply) that can be created through the combined efforts of central banks and governments. They do not stop infusing until the objectives are attained because failure threatens the existence of central banks and governments.
Of course, the monetary infusions carry an inflation element. Old debt is repaid with (new) money. In Roosevelt's day, bread was a nickel; now it takes 80 nickels to buy a loaf.
What might happen next?
In the U.S. from 1929-1932, the money supply was reduced. Beginning April 1932, the Federal Reserve initiated infusions with a program to buy $500 million worth of securities. When this program began, the Dow Industrial stood at 42. Following Roosevelt's' inauguration came the start of the New Deal and monetary infusions. By 1936, the Dow climbed to 190, an increase of close to 450 percent in just four years.
Will history repeat itself? Will the Dow rise from its present 8,000 to 36,000 over the next four years? I doubt it. A sustainable recovery in the financial markets will happen and it will take time.
Until then, watch the number grow.
James D Hallett, investment advisor representative, offering advisory services through Hallett & Associates, P.S., a registered investment advisor. Registered representative, securities offered through Cambridge Investment Research, a broker/dealer (Member FINRA/SiPC) Cambridge and Hallett & Associates, P.S. are not affiliated.
This column is for informational purposes only and should not be used as the primary basis for an investment decision. Consult an advisor for your personal situation.
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