Can the US Deficit Spend Indefinetly?

by Dual Income No Kids on February 6, 2009 · 0 comments

Hi All,

I have mixed feelings about this posting.  In rough economic times, its important to promote and share as much good news as possible. Today’s headlines, however have been exceptionally ugly.

The Washington Post is reporting that America lost nearly 600,000 jobs last month. The nations unemployment rate has climbed to 7.6% – thirty year highs (1).

Whats not as well reported is that the Federal government has been funding most recent stimulus packages through deficit financing – mostly via the issuing of treasury debt.

Well, now it looks like its getting harder to fund the new debt. The economist is suggesting that recent action in bond markets reflects concerns about the amount the US treasury is borrowing:

The biggest force behind the bond-market shock is the onslaught of new issuance as the government seeks to finance the gaping budget deficit, Fed liquidity programmes, mortgage purchases and bank bail-outs. Yields moved still higher this week partly on the Treasury’s announcement that it would borrow a whopping $493 billion this quarter. Wrightson ICAP, a research firm, predicts the Treasury will issue $1.8 trillion this year, which combined with $1.5 trillion last year, would exceed all the net borrowing of the prior 27 years combined“. (1)

This is worrisome. The United States is still the world’s largest economy, its healthy and vibrant in many ways. However, even an economic titan like the US cannot borrow indefinitely without consequences.  At some point, unless an economic recovery sets in, it many become prohibitively difficult to continue to fund such massive federal overspending.  At some point, something has to give. 

Best,

James

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