Dollars to Saturn

The latest national debt figure as of as of October 29, 2008 at 02:58:51 AM GMT (check often, it goes up) is $10,529,390,498,011.35.

Let’s round that to a nice easy number: 10.53 X 10^12.

Of course, this doesn’t even include the bailouts, which are heading toward 2 trillion dollars.

So I was wondering how far a trillion dollar bills laid end to end would reach. I grabbed a tape measure and found that a typical dollar is about 6 and an eighth inch long. So, as a public service, I set out the calculations using scientific notation, which is apparently a necessity these days when talking about politics.

6.125 inches X 10^12 (this is a one followed by 12 zeros, aka trillion) divided by 12 inches per foot = 5.104 X 10^11 feet. Divide that by 5280 feet per mile and you get 9.67 X 10^7 miles.

Which is the same as 96.7 million miles. The earth is about 24,000 miles in circumference, so I figure that’s a bit over 4029 times around the world. It’s also a little more than the distance from the earth to the sun.

And that’s only a trillion dollars. Multiply by, say 12 (current debt plus the bailout), and you’re out past Saturn.

Somebody, quick, shut the Minneapolis Fed up

The Federal Reserve Bank of Minneapolis recently issued a white paper titled Facts and Myths about the Financial Crisis of 2008. It is only six pages of text followed by a bunch of graphs. Here are the "Myths":

1. Bank lending to nonfinancial corporations and individuals has declined sharply.

2. Interbank lending is essentially nonexistent.

3. Commercial paper issuance by nonfinancial corporations has declined sharply, and rates have risen to unprecedented levels.

4. Banks play a large role in channelling funds from savers to borrowers.

The authors of the report, V.V. Chari, Lawrence Christiano, and Patrick J. Kehoe, review aggregate financial data compiled by the Federal Reserve and conclude that none of the above statements is true. In other words, there is lending going on between banks, to businesses and individuals, and that businesses do have other available means of credit.

Of course, the authors acknowledge that "[t]he United States is indisputably undergoing a financial crisis." But they are questioning the "bold action" that is being pushed. Their conclusion, set out in as blunt language as you are likely to see from a Federal Reserve Bank, is this:

Our analysis has raised questions about the claims made for the mechanism whereby the financial crisis is affecting the overall economy. We emphasize that we do not dispute that the United States is undergoing a financial crisis and that the United States economy may be in a recession or may experience one in the near future. Our analysis is based on publicly available data. Policymakers have access to other sources of data as well. Policymakers could well believe that bold action is necessary based on data that are different from that considred here. If so, responsible policymaking requires that they share both the data and the analysis that underlies the need for bold policy with the public.

(Emphasis added)

What interested me was that, from a big picture standpoint, lending is going on quite well during this crisis. It struck me that the only institutions that were having trouble getting financing were the big banks holding suspect assets. Regional and smaller banks are doing fine. (Which answers my late recurring question: if there is no money to lend, why are we still subjected to all these advertisements for refinancing?)

So what is the bailout all about? I think it has to do with helping Wall Street (and big Wall Street at that), rather than Main Street. That's just what the pitchfork people who wrote their representatives at the first vote thought all along. In any event, the Minneapolis Federal Reserve Bank is obviously not playing the same tune as the world fixers.

More commentary here.

Riddle me this, Batman

From an editorial in Barron's, regarding Congress's failure to pass the bailout bill:

HOW DO YOU TURN $700 billion into $1 trillion in a matter of hours?

Simple, by voting down the proposed rescue plan in a fit of either principle or pique.

The $700 billion, of course, was the size of the plan that would authorize the Treasury to purchase impaired mortgage assets. The $1 trillion was the amount that was erased from the value of the U.S. stock market.

Specifically, the DJ Wilshire 5000 -- the broadest measure of the American equity market -- plunged 1,024.27, or over 8%, to 11,322.76. Since every point on the DJ Wilshire is worth $1 billion, those thousand-plus points of fright were worth over $1 trillion.

Does anybody see a fallacy here? I mean, really, do the smart people on Wall Street think that a taxpayer financed injection of $700 billion to support prices at the margin is a fair comparison to the paper loss of financial institutions? After all, the money didn't actually go anywhere (except that those who sold put the money in their own accounts). But the bailout bill would have put real people on the hook for money from their real pockets.

If the Wall Street whizzes really wanted a stock market rally, they should just hope that the US government starts buying stock. That would probably be cheaper than buying the smoldering assets in the basement. Now that would be a plan. Governmental day-trading may be the best way out yet.

Finally the script gets interesting

Just when I thought the fix was in, that the Treasury and the Federal Reserve had pummelled Congress into committing $700 billion plus dollars for the magic experiment in emergency finance, things got interesting. A Federal Reserve Governor has essentially publicly told Fed Reserve Chairman Bernanke to take a hike.

Fed's Fisher Says Rescue Would Increase Fiscal Burden.

This is nigh unto unprecedented. I'm thinking the bailout scheme is in tatters, and ole Ben's days are numbered.

Now, I'm not happy about any of this, but I'm not at all impressed with the ideas coming from the top.

"One of the biggest challenges facing both John McCain and Barack Obama in their commitment to provide tax relief to working-class Americans is the simple fact that millions of them already pay no personal income taxes."

This is the opening sentence of a recent article from Tax Foundation. (H/T to TaxProf Blog.)

Already about 33% of all tax filers pay no income tax. Under the Obama plan, the number is projected to reach 44% and under the McCain plan it is projected to reach 43%.

The article contains this interesting chart showing how the percentage of non-payers has been going up:

I have mixed feelings about this. When the income tax first was implemented, it was designed to affect the highest earners. Most normal workers didn't even notice it.

But now, at least until recently, the requirement of paying at least some income tax was fairly pervasive.

My paleo instincts might suggest to me that it is not such a bad thing to narrow the tax base (in terms of population). But the fly in the ointment is that the government is now the big provider of all sorts of things that cost money. And the budget lately has been growing by the day.

From a policy perspective, however, I wonder what the effect will be on government spending if nearly half of the potential beneficiaries do not have to pay taxes?

A quote by John Adams comes to mind:

The moment the idea is admitted into society, that property is not as sacred as the laws of God, and that there is not a force of law and public justice to protect it, anarchy and tyranny commence. If "Thou shalt not covet," and "Thou shalt not steal," were not commandments of Heaven, they must be made inviolable precepts in every society, before it can be civilized or made free.

John Adams, Defence of the Constitutions of Government of the United States, Works 6:9 (1789)

As I've hinted at before, I think neither of the candidates' policies will ever see the light of day. $700 billion, as a starter bailout, is around $2,300 for every human person gracing the face of our fair country, working or not. I expect in the end that pragmatism will overwhelm theory.

No one knows what to do

A confidence building statement from our Senate Majority Leader regarding the late financial crisis showed up in a Bloomberg article today:

Sept. 17 (Bloomberg) -- The U.S. Congress is unlikely to pass new legislation to overhaul financial regulations this year because “no one knows what to do,” Senate Majority Leader Harry Reid said today.

“We are in new territory, this is a different game,” Reid said at a briefing in Washington. Neither Federal Reserve Chairman Ben Bernanke nor Treasury Secretary Henry Paulson “know what to do but they are trying to come up with ideas,” Reid said.

Mish is thankful that Congress thinks it's too late to do anything before the end of the year anyway.

But I suspect that the Obama vs. McCain tax plan debate is pretty much out the window. Whatever the economic scene looks like in two months, we can be pretty sure that the funding the federal budget will take on even greater urgency. Neither plan contemplated the vast expenditures put out the past couple of weeks.

Sorting through candidate's tax plans

Specifics are hard to come by, but Senator Obama's speech last night reminded me that tax policy will be a big issue in the next couple of months. Both candidates are promising tax cuts for the middle class. Sounds appealling and wonderful, almost as nice as free hot fudge sundaes every week.

Tax Prof Blog has an interesting comparison of the tax "breaks" here. It includes a link to the remarkable Obama Tax Cut Calculator.

I plugged in a single married wage earner with no children earning $100,000 per year and got this:

"Your Obama Tax Cut is: $920.73
John McCain would tax you $289.59 MORE than Barack Obama."

So John McCain has a tax cut too, just not as big.

The key, according to the methodolgy section, is that Obama is mostly going to tax the upper 1% more heavily. But here is the interesting word play:

"Obama will only increase taxes for the top 1% of incomes; and this isn't really an increase: he's simply going to let the Bush tax cuts expire."

There's a lot of missing context and history as to why the Bush tax cuts are set to expire, but it is fairly plain that allowing them to expire is in fact an increase.

One major problem with either plan is that they both look to run up the government debt even more. From the executive summary provided by the Tax Policy Center:

"Both candidates prefer to compare their plans to the “current policy” baseline, which would extend the 2001 and 2003 tax cuts and indefinitely extend an indexed
AMT “patch”—and collect nearly $3.6 trillion less than under current law over the coming decade. Against that baseline, Obama would raise revenues by about $600 billion over the decade, while McCain would lose $600 billion. But choice of baseline doesn’t change how the proposals would affect the budget picture; without substantial cuts in government spending, both plans would sharply increase the national debt. Including interest costs, Obama’s tax plan would boost the debt by $3.5 trillion by 2018. McCain’s plan would increase the debt by $5 trillion."

I'm starting to hear echos of "read my lips. . . ."