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Another $3T of U.S. Debt: Don't Count on Foreigners to Pay for Our Bailouts

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February 13, 2009 – Comments (4)

 

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.

Deej

4 Comments – Post Your Own

#1) On February 13, 2009 at 3:58 PM, DemonDoug (84.09) wrote:

deej, you are kind of forgetting something, and that is a lot of foreign CB's use printed money to buy t-bills, as does our own, and they have the right to do that, so in reality it's kind of a moot point. Japan is either the first or second highest debt-to-gdp of developed nations and it has either first or second amount of us debt as an asset.

I saw Ryding on tech ticker on y fnance.  The guy is a buffoon (who speaks well and looks like he knows what he's doing) who probably was one of the guys that led to the demise of Bear Stearns, and I would only send people to him if I really hated them and wanted him to lose all their money.  He has zero credibility, and I don't know where you can say he is actually pretty good as an economist.

Along with many execs at bear stearns i'd love to see him in jail and if he had any part in the two funds that blew up the year before I would be calling for the chinese punishment for large scale fraud - the death sentence.

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#2) On February 13, 2009 at 4:07 PM, TMFDeej (99.31) wrote:

You're probably right, Doug.  I mentioned at the end of the post that I am in the deflation camp for at least the next year or two.  Having said this, I completely understand the logic behind the argument that higher interest rates and ultimately deflation are coming.  I just think that they will take a lot longer to arrive than most of the people in that camp believe.

Deej

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#3) On February 13, 2009 at 4:11 PM, tahoestock (30.20) wrote:

Deej...

You're right to be worried.  Another solution is for the Treasury to buy the Fed debt.  Of course that leads to greater inflation, but hey, that's next year's problem according to them.  You hit the nail on the head with your last paragraph.

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#4) On February 13, 2009 at 4:55 PM, OtherOracleOfOMA (32.53) wrote:

The way I see it, one of two things will eventually happen: the government will ignore all of the past destruction caused by hyperinflations, spend heedlessly without raising commensurate tax revenue, and destroy the currency. OR, they'll raise taxes (mostly on rich people) and/or cut spending, though in this scenario, it's almost certainly going to be mostly on the revenue side of the ledger, as there's not a whole lot that can plausibly be cut.

Personally, I'm not really inclined to think that the government will destroy the economy with hyperinflation, but then again, the GOPers could possibly win in 2012 and start a few more wars paid for on credit, so I'm not buying any long bonds at the moment.

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