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The president’s stimulus package, which in the Senate version may top $900 billion, will require the United States government to go much further into debt to cover the cost of spending these hundreds of billions of dollars. The question is: Who is going to lend all this money to Uncle Sam?
The current decade Federal government debt has doubled, from $5.6 trillion in 2000 to more than $10.6 trillion at the end of 2008. As the chart below shows, almost $6.3 trillion or nearly 60 percent of the debt is held by the public (individuals, corporations, financial institutions, or foreign holders). The remaining $4.3 trillion or 40 percent is held by intragovernmental agencies (the Federal Reserve, the Social Security Fund, the Federal Employees Retirement Fund, and a variety of other government entities).  The Federal government is already tapping into all of the agencies, such as the Social Security Fund, that are currently running surpluses to siphon off funds to help cover its current expenditures. On the other hand, given the uncertainties in the financial markets, U.S. Treasuries have continued to appear as a relative safe haven for private investors.
However, the Congressional Budget Office has estimated that the Federal government will need to borrow at least $1.5 trillion dollars in the current fiscal year to cover the implemented and planned bailout and “stimulus” spending. To do this Uncle Sam has both to issue new debt and rollover existing debt that matures. It is questionable whether private individuals or corporations in the United States will have either the willingness or ability to finance deficit spending of this magnitude.
At the end of 2008, foreigners held more than $3 trillion or about 30 percent of the U.S. Treasury debt. China tops the list of these foreign holders, with more than $680 billion in its investment portfolio. Japan comes in second, holding $577 billions in U.S. government securities. Great Britain is third with Treasury holdings of $360 billion, followed by the leading oil exporting nations holding $198 billion in Treasuries, and Brazil and Russia holding respectively more than $129 billion and $78 billion. Despite the current economic crisis and the hit American financial institutions have taken during the last six months, foreign holdings of government debt has continued to grow. In November 2007, foreign debt holdings totaled $2.3 trillion, and crossed the $3 trillion mark in October and November of 2008, for a 30 percent increase over the 12 month period.(Japan, however, decreased its holdings of U.S. Treasuries by 4 percent during this time.) The question now is whether the U.S. government, with more than $1.5 trillion in deficit spending to finance in the current fiscal year, can continue to count on foreign lenders to pick up a large proportion of what these expenditures are going to cost . All the European countries are facing growing budget deficits of their own as their respective governments all go down the same stimulus spending path being followed by Washington. It is estimated that European Union nations will likely spend at least a combined total of $250-$300 billion on their own economic recovery programs in 2009. At the same time, the fall in oil prices has cut down on trade surpluses oil exporting countries will have to invest in the U.S. financial markets. The global recession is hitting China’s exporting revenues as well. Furthermore, the Chinese are becoming increasing leery of lending to the American markets. At the recent international meeting of bankers, businessmen, and bureaucrats in Davos, Switzerland, Chinese officials made clear their dissatisfaction with the American market, where they have suffered significant losses in banks and other financial institutions into which they had invested. In the last five months of 2008, the Chinese sold off almost half of the $46 billion is Fannie Mae and Freddie Mac bonds that they had purchased in the earlier part of the year. If foreign lenders do not come to the rescue, Uncle Sam will have to rely far more than in the recent past on the financial markets at home to finance its deficit spending dollars. A lot of new bank lending--with perhaps some of the billions already given by Washington to bailout many of these banks--will have to end up covering the federal government’s expenditures, rather than being available for private sector investment and employment creation. This amount of borrowing will inevitably put upward pressure on interest rates to attract that $1.5 trillion into the government's hands. It will further exacerbate the crowding out of private sector borrowing at a time when prospective profit margins will still be relatively weak. That leaves only one “solution” to Washington’s deficit funding problems: more monetary expansion by the Federal Reserve to provide the spending dollars and keep interests artificially below market-based levels. That can only set the stage for worsening price inflation and a new unsustainable investment boom.
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