The size of the deficit is worrisome to economists. But an article in the January 14 issue of The Economist magazine says that we may have gotten through the recent banking meltdown fairly inexpensively. Previous systemic banking crises have, on average, cost 13% of GDP to resolve, according to the International Monetary Fund. But because the U.S. government offered its assistance in the form of loans (which were mostly paid back with interest by the big investment banks) and stock (which may appreciate in value), the final cost is now projected to be somewhere around $90 billion--almost all explained by losing investments in General Motors, Chrysler and AIG, and by subsidies to homeowners to help modify their mortgages. A proposed special tax on large investment banks could further reduce the cost to practically zero, and the Federal Reserve and the FDIC both made money on loan and bank-bond guarantees. The article cautions that a fair accounting would include the $111 billion capital infusion into Fannie Mae and Freddie Mac, which brings the total bailout cost to something less than 2% of GDP.
Of course, the U.S. government is also spending money to pull the country out of recession. However, almost unnoticed in the deficit debate is the fact that almost all other countries around the world are also running up deficits--for the same purpose. A chart (below), taken from figures in the January 23 issue of The Economist (page 90) ranks the world's economies according to their 2009 deficits as a percentage of GDP. The chart also includes a second figure, which shows the current account deficit--basically the difference between the value of imports and exports. A negative number means that the country is spending more than it takes in; a positive number (as in China) means the country is taking in an excess of capital.
Sincerely,
William T. Morrissey, CFP®
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
321 West Washington St., Suite 329
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022
PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO BOB VERES.
