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
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 â€śrisk freeâ€ť 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 worldâ€™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 â€śitâ€ť 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 dollarâ€¦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
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