$10.2 Trillion? A Mere Drop in the Bucket

As we approach the annual Easter Egg Roll on the White House lawn, Fools are reminded that conventional wisdom warns against placing all one's eggs in one basket.

With a collective response that crams trillions of eggs into one hastily woven basket, the largest bets in history are being placed upon the roulette wheel of global financial markets. The adopted strategy of spending our way out of this mess by propping up the system with loans and guarantees has now been etched into stone ... there is no turning back. To the contrary, I fear the only path ahead implies still further commitments of public funds and woeful undermining of the U.S. dollar.

Sustaining a rally even in the face of quantitative easing and new fiscal interventions to battle the toxic asset menace, investors seem comfortable with the bets even as the stakes rise sharply. Come on, lucky seven! Although I continue to hope for the best, I am increasingly skeptical that the odds are in our favor.

The 684-trillion-pound gorilla in the room
Fools may be right to question whether any amount of money will prove sufficient to sate the hunger of this deleveraging beast. According to the Bank for International Settlements, the notional value of over-the-counter derivatives worldwide reached a mind-boggling $684 trillion last summer. That's more than six times the scale they had reached by 2002 when Warren Buffett dubbed derivatives "financial weapons of mass destruction".

Perhaps the trillions pledged can plug the leaks from subprime mortgages and failed auto loans, but can we reasonably expect to keep a derivatives market afloat that is at least eight times the size of a contracting global economy? I don't know, but I sure hope Bernanke and Geithner do.

The following table provides as precise an accounting of the crisis as the public record presently permits. By my calculations, the combined total of existing, announced, and potential outlays from the Federal Reserve and U.S. government agencies that are directly attributable to the financial crisis will breach $13 trillion!

*"Other loans" total from the Fed's statistical release as of March 18, 2009, which includes discount window lending to banks and brokerages, and the Asset-Backed Commercial Paper Money Market Liquidity Facility.

To be clear, a sizeable disconnect remains between the number of casino chips presently in play and the pile from which more chips may be drawn as needed. Furthermore, to peer ahead toward the ultimate scale of these responses, I have included the following: the $750 billion placeholder inserted into President Obama's 2010 budget for additional bailout funds, and the $500 billion request for FDIC credit now before the Senate with support from key officials.

Wrap your head around this
As mere mortals, Fools are still grappling with the ability of these gargantuan numbers to defy the brain's visualizing capabilities. Try picturing 13 of these. At $44,297 for every American, the sum outstrips the mean annual wage of American workers. At more than $120,000 per household, the sum could have placed us well along the path to energy independence by providing a hybrid vehicle from Ford (NYSE:F), an 8 kW solar panel installation, and a small wind-powered generator to every single American household.

The Yucca Mountain of debt
The glaring message from Washington that dollars will be hurled at this crisis in any quantity deemed necessary raises legitimate concerns about the future purchasing power of the dollars in your wallet, your CD, Treasury bonds, or other dollar-denominated instruments. Occurring in a vacuum, a deleveraging event like this one would be decidedly deflationary. In the context of these outlays, however, I believe stagflation will instead be among the words used by historians to describe this period.

Thankfully, one advantage of our modern financial system is that investors can look to defend themselves against the potential backlash of this response strategy by looking abroad. The Motley Fool Global Gains newsletter team is constantly scouring the globe to identify investment opportunities for Fools who wish to diversify out of the domestic markets, and they're ready to share their findings with you.

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