Wednesday, January 14, 2009

Economics question here

Well lets call it simple math.

I heard someone on CSPAN radio yesterday talking about how the original $350 billion should not be looked at as an expense but as an investment. Because he stated, that is what it is. He went on to say, We fully expect to get a return on the investment.

Another individual also speaking on the same subject at the same press conference when asked how high of a return the American people should expect to see on the "Investment" that they the taxpayers have made = Well, he said, significantly less than 100% and significantly more then 0

now here is my question

If we are to expect significantly less than 100% and significantly more than 0 wouldn't that fall to some place around 40 to 60 % ?

And if this is an investment then wouldn't we be smart to see this as a bad investment at that level of return?

Let me go a bit deeper in a different way of asking my question here.

If I (I will be America for this part of the question) were to ask you (you can be China) for.... oh say a loan for $700 billion and we were to negotiate what the gentleman I was listening to on CSPAN referred to as very good terms and a reasonable rate (lets assume a rate of oh say 1.5% or even 1%) and I turned and handed half of my loan to a homeless guy in front of a bar who smelled of alcohol and bad Mexican food. I told the guy to hand out the money quickly so that it would stimulate my economy and I really don't care where it goes as long as it goes. Meanwhile you ( you are China remember ) are watching the clock start to tick on that loan. now we used 1% as it is very easy to see what one percent can calculate to, just check your credit card statement. 1% of $700,000,000,000.000 compounded monthly would actually add $7,000,000,000 to your total. hmm. So after one month our balance would be $707,000,000,000.00 But here is where it gets fun, the next month we aren't adding $7 Billion. We are adding $7,070,000,000.00 to our total. so now we are at $714,070,000,000.00 and then we do it all again. But this time we add $7,140,700,000.00 so we have a new total balance of $721,210,700,000,00 - I think George and Henry screwed the pooch on this one .....

I somehow have the feeling that the same thinking that went into balling up garbage loans and selling them off for profit is the same logic that went into this whole TARP process.

Am I looking at this in the right light? I am thinking that even at 1% (if we apply the credit card monthly (not the daily interest rate here) we are never getting out of this one) After one year (twelve moths of interest) we would owe you (China remember) $796,665,296,303.30 That's almost 100 billion in interest alone. think we will pay this off in a year? So lets look a little further out, say two years. Our balance would be $897,702,396,512.06 With our expected return on our initial investments being around 40 to 60% we should start expecting to see partial repayment starting around the two and a half year mark. Our balance at two and a half years out in the loan would be $952,929,183,140.36. We would be able to expect say 25% of that which will be returned to us of our 100% investment at about 60% (we will use the larger number to make us feel better) so 15% should be on its way in at that point. OK so 15% of $700,000,000,000.00 would be $105,000,000,000.00 - that won't even remove the interest after 30 months.

If this were a mortgage and we had a 5 year term our monthly payment would have to be $11,965,623,211.82 but our national debt is 10 Trillion right now. How can we make a payment of over $11 Billion when we owe $10 Trillion?

Any one that can help me with this? How wrong am I and why?