“We Owe How Much?”: Waiting for The Big Splatter

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ink splashLast week, a bit of news came out that—weirdly—didn’t garner the attention or the reaction one would have thought it would:  

The U.S. Federal government deficit for fiscal year 2011 was revised to $1.645 trillion. That revision was up from the previous estimate of $1.4 trillion, which itself was a revision just a couple-three weeks ago by the Congressional Budget Office from the White House’s earlier projection of $1.267 trillion in December. 

The additional $378 billion in deficit spending comes from loss of tax revenue: Both from the fall in tax receipts due to the ongoing depression we’re experiencing, as well as from the idiotic budget deal with the Republicans, whereby the Bush-era tax cuts were extended. 

These deficit numbers are huge. Huge. HUGE

As for the total debt, as of January 2011, the U.S. Treasury had $8.965 trillion in outstanding securities, plus an additional $5.166 trillion in “non-marketable” securities—that is, intra-government debts. The total outstanding debt of the U.S. Federal government is $14.131 trillion. 

The U.S.’s gross domestic product in 2009 was $14.29 trillion. 

So this current deficit is over 11.5% of 2009 GDP. Even if we take Office of Management and Budget (OMB) rosy predictions for 2010’s GDP, the deficit is still 10.9% of GDP. 

As to the rolling debt? It’s just about 100% of GDP. 

These are Third World numbers: Deficits that are in the double-digitsvis à vis the gross domestic product—and total debts that equal tha GDP—are numbers that Argentina—Greece—Zambia gets: 

These numbers aren’t supposed to happen to the good ol’ U.S. of A.!

Oh, but they are happening. 

Coupled to those terrible numbers, the Federal Reserve is monetizing the Federal government’s debt—that is, printing money, in order to help the government pay its bills. There’s really no other way to look at it. As I wrote here (when the deficit was still projected at only $1.267 trillion), the Fed is monetizing 50% of the FY 2011 deficit, and buying up an additional 10% with excedents through QE-lite

With the new numbers, that proportion of what the Fed is buying for FY 2011 is diminishing, to 47% of the deficit, of which 37.5% is outright monetization. 

But this is like fiscal heroin: It’s clear to anyone that the Federal government cannot continue to function without the Federal Reserve’s ongoing purchases of Treasury bonds by way of Queantitative Easing 2. With the 10-year at 2.5% interest, there would simply be no demand for Treasury debt, if the Federal Reserve cut off the Federal government—and the Fed knows this. 

So the Federal Reserve will have to continue monetizing the Federal government debt, with no end in sight—it really has no choice: If it doesn’t, interest rates will rise so high so fast, that the Federal government would simply go broke. So when QE-2 expires in June, it’ll be extended: Quietly, and without fuss. 

Again, this is a Third World policy: Deficit funding that nakedly depends on the central bank printing up and buying close to half of the new issuance of debt. 

And on top of everything, this budget deficit is for a budget that has yet to be passed! After all, the fiscal year 2011 budget has not been passed, the government operating since October 1, 2010, under continuing resolutions. The latest extension runs out on March 4—when presumably the budget has to be passed this time—for sure! . . . maybe. 

Yet for all these terribly depressing facts, here’s the rub: 

No one seems particularly concerned. 

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About Gonzalo Lira