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$700 Billion?
Maybe it's only 200 billion; maybe it's a trillion.
What does it mean?
September 25, 2008

The Muser's National Debt pages are all about the numbers…
and I attempt to state those numbers realistically and understandably. So it's time I weigh in on the significance of the $700 billion number that has lately filled the headlines, and is sucking up all the news oxygen. (A Google News search today finds more than 3000 articles containing that number, from just the last 24 hours.)

It's been obvious from the beginning of this story that the 700 billion number has no real meaning. It doesn't seem to have a direct link to any actual assessment of the size of the proposed rescue plan, and few people have any idea what it means to them personally. When President Bush announced his plan, he asked for that amount to buy troubled debt, and simultaneously asked that the National Debt ceiling be raised by $700 billion to accommodate the plan. Many reporters seem to have assumed that it represents a maximum amount.

It's impossible to have any realistic idea…
how much debt will have to be purchased. It could well be less than the $700 billion. And, whatever the amount turns out to be, it will not be buying entirely worthless assets. It's possible that the bulk of the purchased debt will ultimately be repaid with interest, or resold by the government at some profit.

On the other hand, things might be worse. The total amount of troubled debt could be larger than $700 billion, and new, unanticipated events could force the government to intercede in ways not currently in the plan.

What's realistic?
Like everyone else, I'm guessing, which I usually try to avoid on these pages. But I think there will be real costs involved, probably at least $200 billion, likely less than $700 billion, most likely $400-$500 billion. That's the initial cost. Then, later paybacks or resale of some of the assets could restore something like 20%-40% of the cost. If I'm right, that would mean a cost in the range of $240-$400 billion.

It has been my habit to break such numbers down to an individual basis. I've heard several reporters and commentators, a few politicians, and at least one late-night comic attempt that in recent days, but they have all divided the amount by the total population. That's a distortion, because at any given time, a lot of children and a fair number of retired people are paying no taxes, hence paying none of the debt.

What makes more sense is to divide the amount by the number of employed people. While that doesn't accurately describe the number of taxpayers, it's closer than other easily attainable numbers. And the answer iiiiisss…$1,650-$2,750 for the average working person (based on the $240-$400 billion guess).

So, why should we pay that?
A lot of Americans seem to be stuck on the idea that they will be paying to finance a soft-landing for a lot of Wall Street fat-cats. And they're probably right. But there's much more at stake here. In a month or so, many people will be getting quarterly statements form their retirement plans or 401Ks. Those statements will likely cover the period through September 30th, and may already show losses far greater than their personal cost of the bailout.

But it isn't over. The fourth quarter statements that will thud into mailboxes in January, will likely reveal even greater losses. And if this bailout, or something like it isn't implemented, the losses in the fourth quarter and beyond could wipe out half of the average person's retirement. Most people don't see their personal losses (or gains) on a day-to-day basis. Many don't even read those quarterly statements, and don't have any real idea where they stand. Many are unable to equate the bailout cost to their own financial future—but equate, it does. We don't get out of this unhurt, but we absolutely must take action now to change the dynamics. If we don't the ultimate cost will be unbearable.

Necessary or not, it escalates the debt
Having said all of the above, though, I have one other sobering thought. The $1650-$2750 cost of the bailout isn't the full story. It is, of course, a loan that each of us is taking out, that we have no way to repay. For simplicity, let's say the actual cost turns out to be $2000 for each working American. That $2000 won't come immediately and directly out of our pockets; it will be added to our personal share of the national debt—already approaching $67,000. And what we'll each pay will be the interest on that debt. Next year. The following year. The year after that. Until we no longer pay taxes. That interest amount will probably be about $100 next year. That's all. But it will increase each year. If you work and pay taxes for another twenty-five years, the interest is likely to cost you at least $5000, possibly much more if interest rates rise. And you will still owe the original $2000, making your total cost $7000—or more—maybe $10,000 or 12,000.

And that kind of interest cost applies to every penny of new National Debt we incur, whether it's a new energy or education program, or a new tax cut. That's why we have to begin to face the truth about our National Debt.