But almost forgotten in the headlong rush to devise measures to create jobs and save the financial system is the total cost of the government’s commitment to solving the economic crisis.

Bloomberg News reported yesterday (Monday) that the tally of U.S. government spending could reach as much as $9.7 trillion – enough to pay off more than 90% of the nation’s home mortgages.

Already, the U.S. Federal Reserve, Treasury Department and Federal Deposit Insurance Corp. (FDIC) have lent or spent almost $3 trillion over the past two years and pledged another $5.7 trillion if needed. That adds up to almost two-thirds of the value of the entire gross domestic product (GDP) for the U.S. economy last year.

As astonishing as the number itself is a continuing lack of transparency in how and to whom the funds are being distributed.

“We’ve seen money go out the back door of this government unlike any time in the history of our country,” Sen. Byron Dorgan, D-N.D., said on the Senate floor Feb. 3. “Nobody knows what went out of the Federal Reserve Board, to whom and for what purpose. How much from the FDIC? How much from TARP? When? Why?”

Notably, only the stimulus package currently on the table – along with the $700 billion Troubled Asset Relief Program (TARP) and last year’s $168 billion tax rebate – have actually been voted on by lawmakers.  An additional $8 trillion is in the form of government lending programs and guarantees.

In fact, Bloomberg filed a federal Freedom of Information Act (FOIA) lawsuit against the Federal Reserve Bank Nov. 7 seeking to force disclosure of borrower banks and their collateral. Arguments in the suit may be heard as soon as this month.

Meanwhile, the spending goes on. 

The Senate is to vote this week on a stimulus package totaling at least $780 billion that President Obama says is needed to avert a deeper recession.  If it passes the Senate, it would have to be reconciled with an $819 billion plan the House approved last month.

Treasury Secretary Geithner delayed announcing his new plan for addressing the banking crisis, details of which were reported yesterday in Money Morning.  The tab for that bailout is widely expected to total near $1 trillion. 

But questions remain as to what effects the stimulus package and bank bailout will actually have on the economy, both near and long term.
The nonpartisan Congressional Budget Office reported last week that the measure is likely to create between 1.3 million and 3.9 million jobs by the end of 2010, lowering a projected unemployment rate of 8.7% by as much as 2.1 percentage points.

But the CBO also warned the long-term effect of that much government spending over the next decade could “crowd out” private investment, lowering long-term economic growth forecasts by 0.1% to 0.3% by 2019.

And simple mathematics calls into question assertions that another bailout will rescue banks teetering on the edge of insolvency.

Bank losses from the write-offs of bad loans and faulty derivatives add up to $1.5 trillion so far. Additionally, regulators are forcing banks to account for $5 trillion to $10 trillion worth of off-balance-sheet structured investment vehicles.

Given that banking rules require banks to keep assets on hand equal to 10% of those funds, banks will need as much as $1 trillion in the next year. Adding $1.5 trillion in losses means banks will need as much as $2.5 trillion in new capital to remain solvent under current rules.

“The banking system simply has no capital. All the money that’s been allocated so far has been like pouring water into a bucket with a hole in the bottom.” Satyajit Das, a credit expert from Johannesburg, South Africa, told MSNBC.

So is the $9.7 trillion pledged by the government going to be enough to pull the U.S. economy out of the fire? Who knows?

But here are a few facts:

• $9.7 trillion would be enough to send a $1,430 check to every man, woman and child alive in the world, Bloomberg reported.
• It’s 13 times what the U.S. has spent so far on wars in Iraq and Afghanistan.
• And it’s almost enough to pay off every home mortgage loan in the United States, calculated at $10.5 trillion by the Federal Reserve.

Although economists have been throwing around words like “trillion” like it’s nothing, $9.7 trillion is still is a lot of money.

Source: The $9.7 Trillion Pledged to Fix the Financial Mess Could Have Paid off 90% of America’s Mortgages, Report Says

The currency and metals markets began the day rallying versus the dollar, as it seemed yet another huge financial firm was circling the bowl. But late in the afternoon the dollar came charging back, and gold fell back below $850 after surpassing $900, ARRGH! So what caused this quick reversal? Senator Schumer was credited with turning the markets around. He announced, mid-afternoon, that the Federal Reserve and Treasury were going to create a new government institution that would purchase all of the toxic debt instruments being held by Wall Street. Wall Street obviously thought this was just a fantastic idea, and the stock market immediately rallied, taking the dollar with it.

The details of the plan still aren’t available, but the markets have been desperately searching for a hero to come and rescue them, so even the hint of a rescue was enough to shoot stocks back up. The proposal currently being discussed in congress involves moving troubled assets from the balance sheets of American financial companies into a new government backed institution. The SEC also instituted a ban on short selling of financial stocks, copying a similar ban that was instituted yesterday in London. Chuck had a travel day yesterday as the FXU moved from San Diego to Dallas, but he was keeping an eye on the markets and sent me this last night:

“The SEC is contemplating a ban on naked short selling… WHAT? OK… So… This is a free country, and a free market, as long as you follow the government’s rules? Oh Geez Louise, I give up! Not that this has anything to do with currencies, but it does have something to do with the overall direction of this country, which in my opinion is socialist!

“All of you know that I’m a person that is usually happy… But I’m telling you now… These things that the government is trying to do to plug up the leaking damn, are useless! I’m really upset with all this… And I thank my lucky stars that I thought to sell every stock I owned last October! I’m tired of all this junk (read what you want here, because I can’t say it) and I’m not going to take it any more!

“I’m with well-respected investment analyst, Marc Faber, when he says that the hopes for the return of a Bull Market is in ‘fantasyland’…

“So go ahead and lock us down like a police state! I’ll guarantee you it won’t solve a darn thing!

“I had better stop now, because I feel my blood boiling…”

You can always count on Chuck to tell it like it is! He will be back in the saddle on Monday morning with plenty more to say about all of this week’s shenanigans in D.C. and Wall Street.

Bernanke and Paulson have been worn down from the one-off situations they have been dealing with, and finally came to the realization that the problem is much more pervasive than previously thought. Options that U.S. officials are considering include establishing an $800 billion fund to purchase so-called failed assets and a separate $400 billion pool at the FDIC to insure money-market funds. What’s next? Maybe the government will buy all of the Icelandic krona (ISK) that our customers still own. Nope, you and I are just ‘investors’ and have to live with the bad investments we make. That is why this gets me so angry. The folks on Wall Street who made all of these very poor investment decisions using huge amounts of leverage aren’t being held accountable for their actions. These guys should be made to walk the plank, but instead they are skipping away with nice severance packages.

And what does this do to the balance sheet of our federal government? You have to remember, Paulson made his name on Wall Street – where leverage is king and the short term is all that matters. Do you really think he is worried about the billions of debt he has saddled the U.S. taxpayers with? It is almost hard to keep track of all the obligations Paulson and Bernanke have transferred from Wall Street to Main Street. The Treasury has pledged to buy up to $200 billion of Fannie (NYSE:FNM) and Freddie (NYSE:FRE) stock to keep them solvent, while the Fed agreed on September 16 to an $85 billion bridge loan to AIG (NYSE:AIG).

The Treasury also plans to buy $5 billion of mortgage-backed debt this month under an emergency program and the Fed has begun to accept just about any collateral the banks want to pledge at the lending windows. Yes, these two scoundrels have turned the federal government into a giant dumpster for any illiquid assets which Wall Street needs to get rid of.

The question is just how much debt can the United States take on? We are already running deficits that blow my mind; and interest on all of this debt will squeeze out spending for ‘good’ governmental programs. Yesterday the Treasury announced $200 billion in special Treasury bill sales to help the Fed expand its balance sheet. Senator Richard Shelby of Alabama – along with some others in congress – are critical of these takeovers. “We cannot protect all risk in the market, and we shouldn’t do it at the risk of the taxpayer,” Shelby, the ranking Republican on the Senate Banking Committee, said in an interview on Bloomberg this week. But Shelby and others in opposition to more debt won’t be able to combat Schumer and the powerful lobbies of Wall Street firms. The rescue plan will go through.

But where does that leave currency and metal investors? The dollar rallied on the rescue news, with the euro (EUR) falling back below $1.4350. The yen (JPY) got sold off as the Wall Street investors actually started moving back into leveraged carry trade positions. And why not? When the U.S. government will be there to bail out your worst investments!! The carry trade moves actually helped investors in the high yielding currencies of South African rand (ZAR), Brazilian real (BRL), Aussie dollar (AUD), Mexican peso (MXN), and the New Zealand dollar (NZD).

Several readers have asked me to write about what has been happening to the Brazilian real, which has been one of the best performing currencies up until the last two months. The sell-off in Brazil has been due to the ‘deleveraging’ of carry trades. Some investors borrowed funds at a low interest rate to invest into the higher yields of Brazil. With the turmoil on Wall Street, these investors have had to reverse their leveraged positions, selling the Brazilian real and converting back into the Japanese yen or Swiss franc to pay back their loans.

So the sell-off has had nothing to do with the Brazilian economy. Brazil still has an abundance of commodities, including large deposits of minerals and oil, which will continue to be in demand. The stability of their political system is also not in question. The question now is just how much of the appreciation of the Brazilian real was due to the ‘carry trade’ investors, and just how far it will fall due to these reversals. I believe the proposed ’solution’ on Wall Street will not end the recent market volatility. With higher volatility, these carry trades will continue their on-again off-again pattern. Look for further volatility in the carry trade currencies over the short-term. Longer-term holders should be protected by the commodity resources of Brazil.

The South African rand rose against the dollar for a second day as demand for higher-yielding assets and a rally in gold stoked demand for the currency. The rand was the best performer versus the U.S. dollar yesterday and rose as much as 1.4% to 8.0632 per dollar paring its weekly decline against the U.S. currency to 1.3%. As I stated above, the Aussie dollar also rose close to 2% versus the U.S. dollar overnight and the kiwi rose just over 1%.

When the carry trades get put back on, the big loser is the Japanese yen. Financial firms who are having problem borrowing U.S. dollars have turned to the Japanese banks where they borrow yen and then sell them into dollars. The yen dropped over 2% versus the U.S. dollar overnight due to this borrowing.