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Soaring U.S. Budget Deficit Will Mean Trillions in Bond Sales

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April 22, 2009 – Comments (14)

In my previous post I stated that I believe deflation is more of an immediate threat than inflation...unless the market begins to choke on all of the Treasuries that the U.S. government has to issue to pay for its massive budget deficit at a time when tax receipts are collapsing.

Investors who are looking for a clue about whether the value of the U.S. dollar will collapse should beep an eye on the Treasury auctions.  Massive spending on stimulus and bank bailouts exactly at the time that tax receipts will likely fall off of a cliff as unemployment sits at a 25 year high will cause the U.S. budget deficit to explode to nearly four times last year's record deficit of $454.7 billion.

The drop in tax revenue means that in order to fund all of this spending the government will have to more than quadruple its borrowing.  Prices as measured by the CPI will likely continue to fall as long as the value of the U.S. dollar remains strong.  If the market begins to choke on all of this new paper the likely result would be the dreaded stagflation as the value of the U.S. dollar falls making things more expensive at the same time that the higher interest rates that the U.S. would have to use to entice people, particularly foreign governments, to purchase this new slug of debt begin to choke off any potential economic recovery. 

At least that's how I envision the fallout if foreign governments become unwilling or unable to purchase all of these Treasuries that we're (and I use the term "we" very loosely  because I certainly had no input in this matter) are issuing.

The U.S. government's ability to fund its deficit spending is one of the most important things for investors to keep an eye on over the rest of the year.  The following Bloomberg article describes exactly what is happening.  I changed the title from "Billions" to "Trillions" in my CAPS post because that's exactly how much debt the government is issuing.  According to UBS, Uncle Sam will have to sell $2.4 trillion in new bills, notes and bonds in fiscal 2009.

Soaring U.S. Budget Deficit Will Mean Billions in Bond Sales

Deej

14 Comments – Post Your Own

#1) On April 22, 2009 at 7:06 AM, alstry (34.91) wrote:

Deej,

Now you are learning.

You are a funny guy...now you talk about massive deficit spending due to lack of government revenues.

The reason government revenues are evaporating is because revenues and incomes are evaporating.  Debt is crowding out dollars.

And you question my 30-50% unemployment projection??  According the John Williams Shadow Stats we are already at 20% Pre Clinton and our government reports over 16% U6.

My friend, you are about to learn as millions of individuals, companies and state and local municipalities go bankrupt.

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#2) On April 22, 2009 at 7:10 AM, TMFDeej (99.43) wrote:

30% to 50% unemployment and the majority of all companies going bankrupt is over-the-top, I can be a better bear than you can and in the .00000000000000000000000001% chance that my prediction comes true I'll be the king of what's left of the world talk.

Deej

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#3) On April 22, 2009 at 7:25 AM, alstry (34.91) wrote:

My silly silly narrow minded friend.  We are already at 16-20% depending.  We are about to gut our 2/3rds of our auto industry.  What is next, hotels, retail, development, banking, transoportion....you pick...as revenues evaporate.

If you don't do the math....in the end the math will do you.

Alstry

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#4) On April 22, 2009 at 7:38 AM, dbjella (< 20) wrote:

I am an economic novice, but if deflation is what we are experiencing why don't we print more money instead of issue debt?  With the new dollars we could pay off our existing debt.  It appears most of those dollars would go to China, but we could lessen our debt.  I would rather be a country in recession with little to no debt then a county in a recession with massive debt.

 

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#5) On April 22, 2009 at 7:50 AM, alstry (34.91) wrote:

dbjella 

Because issuing debt is how America "prints" money.  It is a little known secret.

If you take your new shiny credit card to the store and spend $1000....you just printed $1000.

 

Deej,

Right now we are at 16.2% U6 unemployment per government statistics....at what number do you say we will NEVER reach and I will give you the month.

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#6) On April 22, 2009 at 7:54 AM, kaskoosek (53.19) wrote:

dbjella

 

Isn't this what the US doing?

Alstry is arguing that government spending is minute in comparison to the hanging debt load.

 

Printing money is a recipe for disaster, because it means that there are funadmental imbalances that are not being corrected.

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#7) On April 22, 2009 at 9:28 AM, dbjella (< 20) wrote:

Kaskoosek -

I don't understand what you mean by imbalances that can not be corrected?

I have always thought that printing money eventually leads to inflation.  If we are (I think we are) in a deflationary period, then why not print instead of borrow? 

 

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#8) On April 22, 2009 at 9:45 AM, TMFDeej (99.43) wrote:

The government is trying to print money fast enough to create inflation, however it is running into two problems.

First, the velocity of money that was created by the shadow banking system that no longer exists (or barely does), the massive use of leverage that is now winding down, and the lack of risk aversion that existed is falling fast.  The government is finding that it can't print money fast enough to counteract the drop in the velocity of money.

Second, for now the U.S. dollar has remained very strong because as messed up as things are here they are just as bad or worse in many other major economies.  Currencies are essentially graded on a curve.  In order for the value of the dollar to fall, it has to fall in relation to another currency.  If Uncle Sam keeps spending like this, I certainly can envision a time that the value of the dollar will fall but it certainly has not happened yet.

Deej

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#9) On April 22, 2009 at 9:55 AM, alstry (34.91) wrote:

Deej,

You give 30% unemployment something like a .000000000001 percent chance of occurring......but you fail to state what level you think it might reach now that we are at 16.2% and growing.......are you afraid of the facts or actually stating your position???

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#10) On April 22, 2009 at 10:17 AM, HenryAlcantara (< 20) wrote:

Hi Deej,

What is the probability or possibility of America going bankrupt? Is Fort Knox enough to pay for all of America's debt? Please enlighten us. Thank you in advance.

Henry & Co.

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#11) On April 22, 2009 at 10:20 AM, TMFDeej (99.43) wrote:

Alsty, perhaps your incoherant, third-person rambling is some sort of satire that I just don't get.  I too understand that things are bad and that they will get worse before we hit a bottom and being to very slowly recover.

You're over-the-top predictions are either created to get a rise out of people, stroke your ego, become the winner in the uber bear contest, whatever. 

When you state that the majority of the companies in the S&P 500 will go bankrupt as you have on many occasions you have absolutely no idea what you're talking about.

During the Great Depression from 1930 to 1935, and things aren't nearly that bad in the United States yet defaults on high yield (this is the worst of the worst aka junk bonds) averaged 9% defaults, with a peak rate in 1933 of 15.4%.  During the recessions of the '70s and '80s, which may turn out to be milder than the current one but they aren't yet, corporate bond defaults averaged 8.8% and 9.9%, respectively.  Defaults were also high during thr 2001 - 2002 period when they ballooned to just under 15%.

So basically the historical record in JUNK bond defaults that was experienced during the greatest depression that the world has ever seen could double and we still wouldn't be any near your outrageous prediction.  And this is junk paper, not investment grade stuff.

I can't believe that I'm even wasting my time responding to you, but there are the actual facts predictions that were made up out of thin air in an effort to draw attention to yourself like yours. 

 

Deej

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#12) On April 22, 2009 at 10:24 AM, TMFDeej (99.43) wrote:

Also, Alsty you're playing the game with a moving target.  The other day I already established that you exaggerated how low the unemployment rate was when you started blogging to make yourself look better and if I had the time I suspect that I would find that you didn't even start talking about the broader measure of unemployment, U6, until you realized that your 50% target that you love to throw around was not even close to possible using the narrower definition.

Deej

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#13) On April 22, 2009 at 3:14 PM, alstry (34.91) wrote:

I guess you are too much of a Deej to answer the simple question on U6....at least you are consistent.

As far as the bankruptcies....this will be much worse than The Great Depression......you will learn or the facts will teach you.

GM went through the Great Depression with flying colors as companies were no where near as leveraged back then.....once we get through this bear rally.....I am confident you will change your veiw and come over to the Alstry side.....very confident.....unfortuately.

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#14) On April 22, 2009 at 3:33 PM, TMFDeej (99.43) wrote:

I don't know what level U6 is headed to, Alsty.  No one knows for certain at this point.  Anyone who pretends to is only guessing.  The situation is dynamic.  So yes, I am being consistent in not providing a concrete estimate other than it won't be the 50% number that you love to throw about so often.

The opposite of consistency is inconsistency, which is what you have displayed when talking about the employment situation.  You're playing the game with a moving target, Alsty. 

The other day I already established that you exaggerated how low the unemployment rate was when you started blogging to make yourself look better.  If I felt like wasting my time shoveling through your drivel, I suspect that I would find that you didn't even start talking about the broader measure of unemployment, U6, until you realized that your 50% target that you love to throw around was not even close to possible using the narrower definition.

You're flat wrong when you say that all companies are much more leveraged today than they were in the past.  Some companies are highly leveraged, but others are in great shape. 

Companies have been hording cash lately,  According to data from Standard & Poor’s, as of Q3 '08 non-financial S&P 500 companies had increased the cash on their balance sheets to $647.8 billion, up 7% from the spring of 2007.  The cash holdings of these non-financials now totals more than 45% of their long-term debt. That’s the highest proportion since at least 1980.

Some companies absolutely will go bankrupt during this mess.  Many already have.  However to say that most companies will go bankrupt is completely nuts.

Deej

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