$700 Billion Was a Drop in the Bucket

I remember when $29 billion sounded like a lot of money.

That was the sum of financing the Federal Reserve provided to JPMorgan Chase (NYSE:JPM) to facilitate the Bear Stearns acquisition back in March. The move may have felt unprecedented, but a century earlier it was J.P. Morgan himself who spearheaded a bailout of the financial system to bring the Panic of 1907 to a close. History is repeating itself lately, so it seems only natural that this company would be called upon again.

From the millions of U.S. dollars tossed about in 1907, to the $700 billion bailout authorized last week, it's clear we're operating on a different scale this time around. Don't get too cozy here in the billions though, Fools, because we've already leapt straight into the trillions. Yes, just a week after the palpable outrage over a $700 billion price tag has begun to erode, my comprehensive tally of total existing and announced outlays from the U.S. Treasury and the Federal Reserve relating to this financial crisis is approaching the $4 trillion mark!

* Conservative estimate based upon the reported size of the daily commercial paper market. "Other loans" total from the Fed's statistical release as of October 1, 2008, and includes the money market funds backstop program of $152 billion.

While we let that sink in for a moment, let's be clear on two points. First, virtually all of these outlays are considered temporary in nature. Through its Term Auction Facility, for example, the Federal Reserve has scheduled auctions for loans with maturities extending only as far as March 2009. On the other hand, we have no way of knowing just how temporary these measures will be. We're told the $700 billion bailout will purchase assets that will be sold once a market reemerges, but we've been given no timeline for how long that could take. Meanwhile, I maintain that the longer those dollars remain in circulation, the greater their ability to debase the value of the dollars sitting in your wallet.

Second, not all of these outlays have occurred quite yet. The Fed's newest facility to support the market for commercial paper was just announced on Tuesday, and the press release did not specify what portion of the $1.3 trillion market from eligible issuers this new facility would represent. For now, I have used a conservative estimate of $100 billion. Also, a doubling of the Term Auction Facility total from $450 billion to $900 billion was just announced on Monday, but the dollars haven't been printed yet. Around mid-September it became clear that further outlays from the Federal Reserve would necessitate fresh money.

Who's going to pay for all this?
At some point, we must concede that the scale of these outlays calls into question the collective ability of the borrowers to repay these loans. How long will it take for a struggling global economy to repay $3.89 trillion? Clearly, we just don't know. We do know that both the Federal Reserve and the Treasury are amassing debt securities as collateral that no private entity will touch with a ten foot pole right now.

The indications from Washington that dollars will be hurled at this crisis in totally unprecedented quantities raises legitimate concerns about the future purchasing power of the dollars in your wallet, your CDs, 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 and hyperinflation will instead be among the words used by historians to describe this period.

In an environment where financials like Citigroup (NYSE:C) and Bank of America (NYSE:BAC) are slashing or canceling dividends, treasury yields are below even the official CPI, and money market funds are struggling not to "break the buck", finding an attractive place to park one's dollars through this sell-off is a challenge of its own. My advice: keep your funds liquid, Fool. I believe opportunities to outperform higher rates of inflation within select equity sectors will soon abound.

Further Foolishness:

• When you feel comfortable, ease back into value.
• It's too scary to hide in the Dow.
• Keep your eyes on Wall Street.