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