Thursday, March 4, 2010

Numb to Numbers

I read a study a while ago (I wish I could find it so I could like to it ... sorry). But it made the point that professional poker players lose sight of the stakes they are playing for. There isn't an understanding that they will push a down payment on a home across the felt. When dealing with numbers that big every day, they lose meaning.

I bring this up when I think about Jim Bunning, the Republican senator from Kentucky who made a stand last week to force the government to pay for what it spends (a novel concept, I know). He did this to force congress to follow the Pay-go rule they just passed.

I think that our esteemed representatives are much like the above-mentioned poker players. Jim Bunning asked his colleagues to pay for the $10 billion that they wished to spend on unemployment benefits. This very important assistance had complete, bipartisan approval and was sure to pass. I don't believe any of those senators comprehend the money they are spending any more. Let's take the $10 Billion as an example. I will now switch from using descriptors (billion) to using the full numbers to show the number of commas and zeros.

Let's take a look at the numbers:

The Senate would like to spend $10,000,000,000 to pay for unemployment benefits. (The net worth of 10,000 millionaires).

What does it cost to borrow $10,000,000,000? The government can 'borrow' money in a variety of ways (actual borrowing, not firing up the printing press). Treasuries and bonds are the more common types. Johnny taxpayer (or the CHinese government), hands over hard-earned cash on the promise that one day, Uncle Sam will pay them back with interest. The rates on these instruments vary but for the sake of argument that the rate is 2 percent and the term of the loan is 30 years.

Given four variables:
Present value: ($10,000,000,000) - this is negative, as we are borrowing it
Future Value: $0 - we plan on paying it off...eventually
Interest Rate: 2.0%
Number of periods: 360 - the number of payments (=12 months * 30 years)

Now we can figure out the payment per month. The payment works out to $36,961,947 (I rounded down to the nearest dollar). But, you ask, how much does it cost Tommy Taxpayer in interest? Good question. The total interest is $3,306,301,017.

Switching back, it will cost just over $3.3 billion in interest alone to pay for this.

To you and me, that is a staggering amount. For the congress-folk, that is a mere .4% of the stimulus package (doesn’t that make it sound like a trivial amount?)

Since Sen. Bunning has decided not to run for re-election, it has freed him up to act more independently. I’d like to think that he made his point.

Below is a loan calculator. You can put in some amounts to calculate what it costs to borrow large amounts. For example, put in 787,000,000,000 (the stimulus package). After you wipe the tears, you will quickly realize that America cannot keep borrowing this way.

1 comment:

Anonymous said...

The calcuator is broken....I wanted to pay over 10000 years, but it won't let me.

Greg