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Credit Crisis Bailouts Debt Fueled Money Printing Flood

Economics / Credit Crisis Bailouts Jan 13, 2009 - 06:04 PM GMT

By: Money_and_Markets


Best Financial Markets Analysis ArticleMike Larson writes: How much is $1.186 trillion — or $1,186,000,000,000, written out the long way?

• It's more than the inflation-adjusted cost of the Vietnam ($698 billion) and Korean Wars ($454 billion).

• It's more than the Louisiana Purchase ($217 billion) and the Savings and Loan bailouts ($256 billion).

• It's greater than the 2007 Gross Domestic Product of all but 13 other countries in the world.

• It's equal to $3,881 for every man, woman, and child in the U.S.

• It could buy 189,760,000,000 bushels of wheat at recent prices. 26,893,424,036 barrels of oil. Or 1,581,333,333,333 cans of Diet Coke at my trusty vending machine in the break room.

Why do I bring this up? Because that $1.186 trillion figure is the projected 2009 deficit, according to the latest report from the Congressional Budget Office (CBO).

And it is downright scary.

These Numbers Are Big — Really Big!

That $1.186 trillion is such a large number — so out of control — that it's hard for most of us mere mortals to process it. Suffice it to say … It's the biggest flood of budgetary red ink any country has ever seen in world history. And it makes last year's $455 billion deficit look like chump change.

It's not just the absolute number, either …

The projected 2009 figure is equal to about 8.3% of U.S. GDP. That tops the post-World War II record of 6% set in 1983.

Still not worried?

Then get a load of this:

The CBO estimate doesn't even include any potential stimulus package from Congress and the Obama administration.

We haven't gotten the final details of the stimulus plan. But it could cost anywhere from $675 billion to $1 trillion. That means the ultimate 2009 deficit could end up being larger by 60% … 70% … 80% … or more!

Is the red ink a short-term problem, one that will soon go away? Not according to the CBO. Scroll through the agency's report — “The Budget and Economic Outlook: Fiscal Years 2009 to 2019″ (available at: ) and you'll come to a nifty table on page 23.

It projects red ink as far as the eye can see: An ADDITIONAL $3.135 trillion from 2010 through 2019 .

2010-2019 Deficit Forecasts in Billions of U.S. Dollars

Source: CBO

Two possibilities could bail us out of this black hole of debt:

  1. Congress and the incoming administration could really clamp down on spending going forward to stem the tide of red ink.
  2. Or the stimulus plan could manage to completely offset all the credit, real estate, and economic problems, thereby leading to a windfall in tax receipts.

Both are highly unlikely …

And if neither scenario comes about, this country's finances are going to be blown to hell for years and years to come.

Consequence-Free Borrowing Forever?
Not Bloody Likely

Now if you're the type of person who believes consumers, corporations, or even sovereign nations can borrow money they don't have … and spend far beyond their means … for all eternity, then you can stop reading right now.

The amount of money Obama will need in 2009 scares the bejeezus out of me.
The amount of money Obama will need in 2009 scares the bejesus out of me.

There's absolutely nothing to worry about.

But if you're like me, and you think numbers like $1.186 trillion are so far off the charts that they HAVE to have consequences, then you should be downright scared!

The government is already selling record amounts of debt at auction, day after day, week after week.

This week alone, Treasury sold $8 billion in 10-year TIPS and $24 billion in four-week bills on Tuesday … $30 billion in 3-year notes and $35 billion in 70-day cash management bills on Wednesday … and $16 billion of nominal 10-year notes on Thursday. And there's no end in sight.

Total net issuance could approach a mind-boggling $2 trillion by year's end!

At some point, investors are going to balk at all this issuance. They're going to choke on the massive amount of U.S. paper spilling out of Washington. They'll demand higher yields to buy our debt, driving bond prices down and interest rates up, just as I warned in my December 5, Money and Markets column, “The Biggest Bubble of All: Long-term Treasuries?” .

Heck, the day of reckoning could already be upon us …

Thirty-year Treasuries plunged more than 3 points on New Year's Eve … another 2 30/32 on January 2 … a whopping 5 16/32 on January 5 … and another 1 28/32 on January 7. They've lost almost 13 points in a virtual straight line, while yields on 10-year notes shot up from 2.25% to 2.5%.

My advice remains the same: Short-term Treasuries are fine as a place to park your keep safe money. But stay the heck away from long-term U.S. debt.

Until next time,


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