Another $3T of U.S. Debt: Don't Count on Foreigners to Pay for Our Bailouts
I came across an interesting article on Yahoo! about all of the debt that the U.S. is going to have to issue to fund all of the bailouts and stimulus spending that it is doing this afternoon. The piece quotes John Ryding of RDQ Economics (who is actually pretty good) on the subject. Ryding believes that the United States "may have trouble funding" its deficit in the coming months.
With the Federal Reserve's doubling its balance sheet to around $2 trillion, with a possible doubling again before this whole ordeal is said and done and the federal deficit likely to balloon to nearly $1.5 trillion in fiscal 2009 and at least $1.25 trillion in fiscal 2010 the Treasury Department is going to have to issue nearly $3 trillion in bonds in the near future.
The problem isn't that foreigners (who have purchased as much as two-thirds of our debt in recent years) are sick of paying for our mistakes and waste (though it probably should be), instead foreign countries simply don't have the money that they had to buy Treasuries.
China was using all of the money that it got from exporting goods to the U.S. to buy them and the countries with oil-based economies were using the money that they got from shipping us black gold to buy them. Now that the price of oil has collapsed and exports to the U.S. have fallen dramatically, not only do major buyers of U.S. treasuries like China (1st largest buyer), Japan (2nd), Middle Eastern, (5th collectively), Brazil (6th), and Russia (7th) have less money coming in, they are going to have to spend what reserves that they do have to prop up their own ailing economies.
The arguments that Ryding outlines make sense and if they come to pass they would lead to higher interest rates and ultimately inflation. Having said this, I personally am still more worried about deflation for the rest of 2009 and possibly 2010.