Bailout Costs in Perspective
World War II cost about $2.1 trillion in 1990 dollars, which I calculate to be $3.5 trillion in 2008 (assuming 2.8 percent inflation over the period.). (San Francisco Chronicle puts a $5 trillion tag on WWI, though.) It took 50 years to pay off that debt. Last year, the sum value of all goods produced in the United States was about $16 trillion. Never in history the US government obligated half of the GDP in just 8 weeks.
Assuming the government can finance $7.7 trillion at 2.8 percent (assumed inflation) compounded annually on a 100 year note, the payment would be $230,144,154,619.15 per year. (That's $230 billion). Cut the repayment period to 30 years, and the payment swells to $382 billion.
Bailout Bill Will Never Be Repaid
Since we are already running an annual deficit of about $1 trillion, this new debt simply increase that debt. In year 2, the deficit would swell to about $1.5 trillion. In other words, creditors will quickly figure out that they will never be repaid.
Would you lend the government money at $2.8 knowing that only perfect circumstances will allow the government to survive? I wouldn't.
Moody's already hinted that Federal Reserve notes might drop to some credit rating below AAA in the next 8 years. That prediction came in 2006 and was based on the costs of Social Security and Medicare. That was about $8.7 trillion ago. Expect US Treasuries to drop to AA, A, or worse in the next 24 months.
A lower rating will force the government to pay higher returns in order even out the risk. Say Treasuries go to AA and 5 percent. The payment on a 100 year note leaps from $230 billion to $387 billion.
So what if the government raises taxes?
A tax increase to pay off this astronomical debt would decrease government income, thereby accelerating the debt accumulation. George Bush's tax cuts increase federal revenue about 10 percent, so repealing them would logically cut revenue 10 percent. Again, creditors will never get paid.
Only Possible Solution
The only viable solution to the problem is one Barack and the Democrats will not consider: eliminate all unconstitutional government departments, programs, and entitlements while holding the line on taxes.
The Constitution prohibits the government from running Social Security, Medicare, Medicaid, the Department of Education, the Department of Homeland Security, and most of the agencies that sprang up in the 30s, 60s, and 70s. Those programs account the fast majority of government spending, along with the service on the national debt. (Read Article I of the US Constitution to see the exhaustive list of programs the government is allowed to run. All other programs are unconstitutional.) Those unconstitutional programs account for about 70 percent of the 2007 US Budget, or $2 trillion.
Feeling nostalgic? In 2005 and 2006, the deficit was shrinking and government revenues were increasing at about 14 percent per year, the fastest in 25 years.