Bloomberg is reporting that total commitments from the U.S. federal treasury in response to the continuing global financial crisis are approaching the total value of the U.S. Gross Domestic Product (GDP) — the total value of all goods and services produced in the United States in a year.

On first blush, that sounds extreme — and extremely scary.  The idea that the country could be on the hook for such an amount is intimidating in the same way as a family suddenly taking on a new debt in the amount of its yearly salary income on top of previously existing mortgage, credit card, and student loan debts.  Ouchie.

But a closer look at the number shows that the bailout number is less than meets the eye.  Most of the federal treasury commitments is in the form of loan guarentees rather than cash out the door.  This means the government is functioning as backstop, not sugar daddy.  It is highly unlikely that anything more than a small fraction of these guarentees will actually be paid out.

Also, much of the money actually expended is in a form that amounts to exchanging one type of debt for another.  In short, the government isn’t really pushing new cash out the door if it is simply using that cash (or other form of treasury security) to purchase existing treasury securities.

In the end, there does still appear to be a huge amount of money going out the door here, with potential risks for future inflation becoming very significant as a result.  But the situation is less devastating than it may appear on the surface.  Also, it’s not like there was much of an alternative:

“The comparison to GDP serves the useful purpose of underscoring how extraordinary the efforts have been to stabilize the credit markets,” said Dana Johnson, chief economist for Comerica Bank in Dallas.

“Everything the Fed, the FDIC and the Treasury do doesn’t always work out right but back in October we came within an eyelash of having a truly horrible collapse of our financial system, said Johnson, a former Fed senior economist. “They used their creativity to help the worst-case scenario from unfolding and I’m awfully glad they did it.”