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Math Riff: Flipping Coins for Lucky Numbers $7 Billion and $700 Billion


Big numbers starting with seven are in the news this week, and it’s worth a Math Riff to try to get a handle on just how much tax payer contribution our elected leaders are asking us to sign up for. It’s those billion dollar figures again that boggle the mind. Did you know a billion dollars worth of pennies weighs 312,000 tons, and would make a cube 126 feet on a side? Or that there are over 2 billion pennies in circulation today?

The $7 billion dollar amount is the current revenue short fall in California. Governor Schwarzenegger is getting ready to hit up Uncle Sam to cover the gap until the credit markets loosen up and the state can go back to conventional lending sources to cover its cash needs. That should get California through this fiscal year, but what the state will do next time around is anybody’s guess... Unless the California tax payers can find two million pounds of pennies in between their couch cushions or car seats, there could be an even bigger crunch come next year.

For even bigger fun the $700 billion dollar figure represents the potential total amount authorized this week by congress and the president to purchase mortgage backed securities. The hope is this action by the federal government will stabilize some of the organizations holding on to these instruments and put them back in good enough shape that other companies will feel comfortable doing business with them. It’s possible just knowing the government is a potential buyer of last resort may build confidence, and if we’re lucky maybe the full $700 billion won’t be tapped… Only the first $250 billion is approved initially. Initially, that’s 78 million pounds of pennies stacked in a cube almost 800 feet on a side. Maybe it’s time to buy stock in copper mines. Oh wait, pennies aren’t made of copper any more.

Anyway, the government hopes to sell these securities back into the market somehow, or otherwise collect some of the money these securities would generate. In that respect, it’s like the federal government making an enormous bet on the housing market recovering… If we’re actually at the bottom and these securities have some intrinsic value that’s just being buried due to mark-to-market accounting rules, some people think the government could make a profit here… As a taxpayer, I’m not sure anyone should be expecting that.

Other than starting with a lucky digit, is there a comparison to be made between a federal loan for the California budget deficit and the MBS bailout? In theory, the $700 billion MBS bailout is buying something tangible and a good chunk of that should wind up returned to the Treasury as the markets stabilize and markets for those securities re-emerge. The California budget shortfall, however, is pure spending… It’s gone once it’s received and California tax payers will be on the hook for repaying that loan, plus closing the gap with next year’s budget. In my mind, that could be a bit scarier because it’s an ongoing gap. Fortunately, that gap is somewhat tangible.

Per person how much is $7 billion for California residents? According to estimates from the census bureau, California has about 36.5 million people living there. That means California is short this year just a bit under $200 for every person living in the state. That sounds a bit more manageable. You can probably find $200 in loose change in some cars around Beverly Hills.

The MBS bailout may be somewhat secured, but the numbers there aren’t nearly as friendly… The population in the United States is right at 300 million people, so the MBS bailout package at $700 billion amounts to roughly $2,300 per person if the entire amount is spent. In terms of tax payers, the most recent available statistics from the IRS show that in 2006 just under 93 million tax returns were filed, which means that $700 billion amounts to $7,500 per tax payer. If you factor out returns where the net tax was under $100, that reduces the total to 65 million returns or just over $10,000 per actual tax payer. Ouch.

Another interesting statistic is to look at this $700 billion as a fraction of the total real estate assets in the United States. The Federal Reserve reported residential real estate assets in 2006 (the market peak) at a value of $19.8 trillion, and estimates based on the drop in median housing prices are that this value is now about $13 trillion dollars. At $700 billion, the government is taking a roughly 5% stake in the current asset value of all U.S. residential real estate… And probably the riskiest 5% at that.

Here’s to hoping that luck is on the side of the $10,000 investment the government just made on my behalf.

Links:

Tax Payer Statistics, Straight From the Horse's Mouth And the Specific Ones from 2006 Cited Above U.S. Census Data on California Some Really Fun Penny Facts Everything You Wanted to Know About Pennies