The last time U.S. federal government spending topped 28% of Gross Domestic Product (GDP), Franklin Delano Roosevelt was in the White House and the nation was fighting all-out war on two major fronts.
As the chart shows, total federal government outlays have hovered around 18% to 22% since the early 1980s. But based on projections from the non-partisan Congressional Budget Office (CBO) President Barack Obama's proposed Budget would push total federal spending to near 29% of GDP in fiscal year 2009; the U.S. federal deficit is projected to be more than 13% of GDP in 2009 and close to 10% in 2010.
And there's a catch: both the CBO and the White House are assuming the U.S. economy grows by an average rate of more than +4% over the coming decade, a generous assumption given current economic conditions. This skews the numbers in terms of percent of GDP -- actual federal spending is projected to rise from a nominal $2.98 trillion in fiscal year 2008 to more than $5.1 trillion in fiscal year 2019.
Of course, spending is only one part of the equation. The federal government has also announced a series of plans aimed at stabilizing credit and financial markets. The list includes the Fed's plans to lend money to banks using asset-backed securities as collateral, plans to purchase Treasury bonds directly and lines of credit to foreign central banks. Not all of these measures show up as federal spending but they certainly can have real economic effects.
Some will argue that this spending is necessary to lift the U.S. economy from a serious and painful recession. Others believe the government's massive spending plans will ultimately spell higher inflation and a rising tax burden for future generations. But, one thing is for certain: the amount of fiscal and monetary stimulus emanating from Washington is unprecedented in U.S. financial history and all that cash spells a profits bonanza for certain key companies and industry groups.
Here's a brief guide to some of the major spending and fiscal stabilization plans announced by the government over the past year:
Troubled Assets Relief Program (TARP)
This was the $700 billion so-called bank bailout bill passed in October 2008. The original plan was for the government to purchase residential mortgage-backed bonds and other asset backed securities directly from banks. The idea was that there was no real market for these troubled securities due to the financial turmoil; by purchasing the assets from the banks the government would inject capital into the banking system and create a market for these securities.
But soon after the TARP bill was passed, the financial crisis worsened and the government switched tactics. Instead of buying assets from the banks, TARP morphed into a plan to invest in preferred securities and common shares of major banks as a way of injecting capital into the system.
TARP funds have also been used for other purposes such as lending to General Motors, AIG and Chrysler Corporation. As of mid-April there was a little over $100 billion of the original TARP package left unspent. Much of this is earmarked for use as part of the Public Private Investment Fund (PPIF) explained below.
Term Asset-backed Lending Facility (TALF)
This is a roughly $1 trillion program being managed by the Federal Reserve Bank of New York. The original idea was to try and revive the market for asset-backed securities (ABS). An ABS is a type of bond that's backed up by loans such as auto loans, credit card loans or real estate loans. The market for such securities totally dried up late last year.
Under TALF, the Fed will loan money to banks on favorable terms allowing the banks to post their ABS as collateral on those loans.
Public-Private Investment Plan (PPIP)
The PPIP sounds much like the original TARP in that it is a plan to purchase securities directly from banks. In fact, PPIP is expected to use $75 to $100 billion of TARP funds.
It's a complex plan but the basic idea is that the government will partner with private firms to purchase so-called "legacy" assets from banks -- these would mainly be ABS securities. These pools of assets will be auctioned off by the Federal Deposit Insurance Corporation (ev367) and sold to the highest bidder.
The winning bidder would then partner with the government to create a fund. The purchase of each pool would be funded by equal parts private capital and government capital and a generous amount of leverage supplied by the government. The FDIC would also guarantee the loans to fund the vast majority of the purchase.
The so-called American Recovery and Reinvestment Act is more commonly known as the stimulus plan. It's a $787 billion spending bill that is designed to help boost the U.S. economy.
On the spending front, the bill contained a $3.7 billion package to provide an $8,000 tax credit for first-time homebuyers and a credit that allows consumers to deduct sales taxes for new vehicle buyers.
Energy-related investments were another big spending area. The stimulus bill includes $50 billion in spending aimed at incentivizing the purchase of hybrid cars and weatherizing homes. And the package also provides funding for a number of Department of Energy projects including a demonstration project on carbon capture and sequestration, defense-related environmental clean-up and $4.5 billion in funding for electricity transmission improvements.
And, the bill has also been called an infrastructure spending bill in the media. The plan does call for $27 billion in highway repairs, $8.4 billion in mass transit systems, $8 billion in high-speed rail construction and funding for projects to repair levees and water systems.
In addition to about $500 billion in new spending, the bill contains provisions to spare many lower income Americans from the Alternative Minimum Tax (AMT) and a $400 tax credit for individuals earning less than $125,000 and a $800 credit for couples earnings less than $250,000.
There are several major healthcare initiatives that are in the stimulus plan and in President Obama's preliminary budget proposal. The President has proposed a $630 billion healthcare reserve fund that is designed to lead toward universal healthcare coverage.
The stimulus package and budget also offer additional funding for medical research, $19 billion on healthcare information technology initiatives, changes to the Medicare system and proposals to encourage greater use of generic drugs.
With these points in mind, in the text that follows my staff and I profile two stocks that stand to benefit from government spending programs...
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