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Forex Blog - Can the US Treasury Fund $787bln Stimulus on Top of a $600bln Budget Shortfall without a Bond/Dollar Rout?

Can the US Treasury Fund $787bln Stimulus on Top of a $600bln Budget Shortfall without a Bond/Dollar Rout?


Yes for the foreseeable future. 


We are in the midst of a global ugly contest.  Every major economy and policymaker will be where the Fed and US Treasury are and based on recent data showing a collapse in global trade including industrial production in Europe and Japan it will happen much faster than anyone would have imagined just a few months ago.  So my initial premise is that markets are discounting mechanisms and appropriately are discounting zero bound monetary policy and large fiscal stimuli for major countries across the planet and the US has a hard start on the policy mix and a head start if effective in exiting the policy mix in the medium-term.   


US private savings is rising rapidly as households and firms stop spending and investing in response to economic fears and declining asset prices.  Fear also permeates portfolio preferences right now and this favors US Treasuries (principal protected and backed by the good faith of the US government) or “risk free” assets and penalizes risk assets or everything else (apart from gold and cash) especially equities and corporate debt.  If anything the huge debt supply the US government is issuing is crowding out savings that would otherwise fund private sector activity via company debt and equity demand.  For the time being, the more debt the US government issues the less money available to support other securities and the more domestic private savings grows, the less need for foreign savings to finance the US budget deficit and current account deficit.


Timing is always tough when one tries to guess the turning point in confidence in government policy mix for an emerging country much more the government policy mix of the national guardians of the world’s reserve currency.  My hunch is even very bad policy mistakes (and there will be more ahead) will take a far longer time to trigger a funding problem for the US government than it would for say Argentina or Great Britain.   It is way too soon to expect even a forward discounting capital market to price in the end of the dollar as the reserve currency and a Jim Grant outcome for US government debt.


Every prior economic and political crisis the US has faced that required massive government spending and bloated government deficits including the Great Depression and WW2 was met with cries to halt the government printing presses or run the nation into ruin has been followed by periods of technological innovation, productivity enhancements and a much larger economy (private sector) reducing the existing debt to GDP ratios substantially.  While I am not a futurist and have no idea what the next “it” is, history tells us that innovations do not have limits and it is not wishful to think more generational technological innovations will emerge ahead that will grow GDP to such an extent that the trillions in US deficit spending expected in the next few years (and future unfunded entitlements) are a manageable share of GDP in the long-run.  This is not a defense of profligate spending or pork barrel politics.  But it is worth taking a deep breath when the next sheep herder cries wolf about the budget deficit and unprecedented fiscal stimulus bringing the ruin of the US economy and US dollar in the relatively near future.


Get ready for more $800bln sons of fiscal stimulus packages and $700bln daughters of TARP.  And guess what?  US Treasuries will not likely fall into a burning vortex of cascading confidence and ever lower US dollar…that case will take a very long time of policy mistake on top of policy mistake to bring to fruition and where the rest of the world is pursuing sound policies.   Unless the US public votes the likes of Dick Fuld or Chuck Prince into the Oval Office, repeated and compounded policy mistakes are anything but assured.  


David Gilmore


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