Well, at least that's the plan. I have no idea where that amount of cash might be lying around. More likely we'll be borrowing some and printing the rest.
On March 20, 2009, the bipartisan Congressional Budget Office (CBO) released its latest forecast in an effort to take into account the impact of the recently released Obama budget. The verdict? A whopping $1.8 trillion deficit for 2009, approximately four times larger than the all-time record established in 2008 ($455 billion).
The concerns raised by this latest forecast are many:
1) A mere two months ago, the CBO’s estimate for 2009 was “only” $1.2 trillion. They have already grossly underestimated a deficit that will most likely continue to balloon in the coming months.
2) While the new administration has focused its attention on the spending side of the budget, it has paid little attention to the other side of the equation. What will happen when tax revenue comes in much lower than current projections?
3) Even ignoring the likely expansion of the projected deficit, where will we get the $1.8 trillion needed to cover the CBO’s estimated deficit? Foreign investors? Higher taxes? Or that old standby, the printing presses?
The U.S. government needs to roll over $2,596 billion of outstanding Treasury bills and notes coming due in 2009 before it can add any new borrowing to finance the expected deficit. In previous years, foreign investors have invested most of their trade surpluses – to the tune of $200 billion to $500 billion per year – in Treasuries and agency debt. We cannot expect this trend to continue as we go forward, especially given that China, Japan, and the Middle East are experiencing a sharp decline in their exports and have indicated that they will have to support their own economies with massive stimulus packages. These actions will further reduce their propensity to buy U.S. debt. The Treasury Department recently reported that in January 2009, international sales and purchase of U.S. assets showed a net outflow of $148 billion. This could be a sign that “the times, they are a-changin’.”
Assuming that foreign investments will not represent a large source of financing for the $4 trillion plus of U.S. Treasuries our government needs to sell this year, we will be forced to rely on domestic institutional and private investors. The problem here is that a great deal of institutional and private money has already fled from riskier categories of assets into lower-yielding Treasuries. If anything, these funds will be looking for higher-yielding investments as soon as possible.
In the absence of sizeable increases in tax revenues, it is quite clear that the lion’s share of the planned sales of Treasuries in 2009 cannot be met by demand from the market. Either the Treasury will have to raise interest rates significantly, or the Fed will need to step in very aggressively to support the planned auctions. Our expectation is that both will happen. Auctions will fail and the Fed will step in. The market will react to more printing by anticipating inflation and demanding higher interest rates.