Friday, June 5, 2009

U.S. Government Debt: A Crisis in the Making

Today in the Financial Times there was a good article explaining what I believe will be the cause that will bring about the next phase of the crisis. At this point he FED will step in to buy any gov't shortfall in treasury sells. When this happens, eventually gold will rise and the stock market will fall; the true bottom will be when the Dow/gold ratio is between 1 & 2.

Here are some excerpts:

This year, according to the Organisation for Economic Co-operation and Development, projected gross issuance by OECD governments will jump to almost $12,000bn of debt, up from $9,000bn two years ago (and many times the level a decade ago.) The US alone is projected to sell almost $8,000bn, in gross terms.

Some countries, such as the UK, have a tradition of selling long-dated government debt to local pension funds, which reduces the need to roll over the existing debt stock too freque- ntly. In the UK, for example, the average maturity of government debt was 14 years at the end of 2007, or just before the crisis broke. Australia, France, Austria and Greece also have long(ish) maturities, of between seven and 10 years. But other European nations such as Hungary and Norway, have average maturities below five years. Meanwhile, the average US maturity in late 2007, was just 4.7 years and will almost certainly decline further. This year, the OECD projects that no less than 70 per cent of US issuance will be short term. That leaves the treasury market now exposed to a mild version of the same problem that plagued conduits or structured investment vehicles that relied on short-term funding in the commercial paper market: namely “rollover risk”.

U.S. government debt is a means to fund present consumption (which is anothe way to say spending). My perception is that there will be another major government bailout of the financial industry (and possibly for Main Street). Since the $700 billion TARP hasn't done the trick, they most likely will up the ante, say, an additional $1 trillion. I'm guessing about the actual figures, it could be more or could be less. We are in a bailout economy. This won't stop until the powers-that-be's checks bounce in the form of money printing to cover expenses instead of relying in traditional tax revenue. The FED will monetize the debt. Panic will set in. Investors will sell. A massive capital outflow could occur. Where will the money go? Commodities, i perceive. Thus we have a currency crisis. If this were to happen say on a monday, by the end of the week expect riots and demonstrations (a la Argentina). The Dow and gold will trade between 3K - 4K: a one-to-one ratio. When this happens, i.e. dow/gold ratio is between 1 & 2, we can surmise we've hit the proverbial bottom.

When will all this happen? I have no idea. But I do expect it will occur within the next 18-24 months. My short-term view, however, is that by Sept/Oct. we'll see another run towards Dow 6,000.

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