One of the investment newsletters that I regularly read from an investment manager is Eric Sprott’s “Markets At A Glance” which he publishes monthly at Sprott.com. His latest newsletter for June titled “The Solution… Is The Problem” talks to the specific issue of US Government debt and the future implications for investors given the amount of money that the US Federal Reserve is printing in order to finance this debt.
In 2009 the US Government must sell $2.0 trillion in new debt in order to finance an expected budget deficit of $1.85 trillion and $196 billion for the wars in Iraq and Afghanistan. The large budget deficit is due to all the money dished out this year in the form of bailouts (GM, Chrysler, AIG etc..) and economic stimulus aimed at breathing some life into economy. To put these numbers in perspective the 2008 US budget deficit was $455 million which is by no means small in itself.
So what does this all mean? It means that the US Government will have to find buyers for 3x the amount of debt that was issued last year. This is all fine as long as there are enough investors out there willing to buy all this US debt.
In the newsletter Sprott analyzes each class of investor who could potentially be a buyer of this $2.0 trillion in new US debt and comes to the following conclusion.
Given the current state of the economy, it seems frighteningly apparent that a threefold increase in debt purchases by the account holders listed above is a mathematical impossibility. There is simply not enough money in the present economy to support a tripling bond issue in the normal course of business.
So if there are no buyers out there with any capacity to absorb all this US debt what will happen? The US Federal Reserve will step in to support the US debt market as the lender of last resort. How will the US Federal Reserve fund the purchase of all this new debt? You have probably already guessed it, by printing new money.
The Federal Reserve’s ‘solution’ to the debt problem is the problem. It has resulted in the Federal Reserve doubling the monetary base of the United States over the span of a mere nine months. Rather than stimulate the real economy, the QE program has instead resulted in increasing weakness in the international market for US bonds.
The future solvency of the United States as a nation state is currently in jeopardy. It is in far deeper trouble than the mainstream press cares to admit. There are simply not enough new buyers of debt on this planet to support the spending programs of the United States government – and it appears that current holders of debt are beginning to sell. Because it is impossible to balance the budget from outside sources
of capital, the only source of funds left for the US, in all reality, is continued money printing.The Federal Reserve’s policy of Quantitative Easing is failing. The US budget is ludicrous, spending is out of control, spending promises are out of control, the world knows it – and we know it. For all the pundits who see the economy improving over the next year, we invite you to explain to us how this debt crisis will resolve itself without significant turmoil.
Implications For Investors
- Potential long term devaluation of the USD
- Threat of increased inflation in the future is high due to rapid expansion of the monetary supply
- Will a loss of confidence in the United States bring the recent rally to a grinding halt and send us back to test the March 2009 lows of the TSX Composite?
