Gorging on Debt

Posted on April 8, 2009 by David Laidlaw 

Milton Freidman, the Nobel award winning economist, quipped that “there is no such thing as a free lunch.”The government’s fiscal and monetary stimuli are no exception to this axiom.

During the first month of every quarter, the U. S. Treasury announces how much money it borrowed during the previous quarter and how much it expects to borrow during the present quarter. Following is a brief table of this activity:



*figures are in billions borrowed; negative stat in 2nd Q 2007 indicates debt repaid; 1st Q 2009 number is anticipated borrowing

These figures demonstrate the incredible borrowing surge that started during the second half of last year. Expected borrowings for this quarter are over 100% more than the similar period for 2008.

This pattern of increased borrowing is also mirrored throughout the developed world.In mid-March, the United Kingdom tried to sell £1.75 billion ($2.5 billion) worth of 40-year bonds yielding 4.25%.For the first time in almost 15 years, the auction failed to attract enough bids. The market sent a clear signal to the UK Government that it will struggle to sell its debt to fund future borrowing.

We expect a similar dynamic to develop here given the sheer volume of issuance.Over the past decade, we have relied on foreign governments to purchase our debt. The Chinese and Japanese were able to buy our Treasury Securities due to their huge export volumes.Middle Eastern governments have also been large purchasers, especially when oil prices were high. Oil prices are about 35-50% of what they were last year and Asian exports are also down by about 25% from the prior year.

Our trading partners will not be able to continue to loan us increasing amounts of money. When this happens, interest rates will spike higher to attract funds and inflation will follow. Our hope is that this process does not occur before the recession ends.