Who Is Going To Lend US Money To Fund Its $2 Trillion Deficit?

Pimco's Bill Gross talked about it in his newsletter Staying Rich in the New Normal

• The immediate question is who is going to buy all of this debt? Estimates suggest gross Treasury issuance of up to $3 trillion this calendar year and net offerings close to $2 trillion – almost four times last year’s supply. Prior to 2009, it was enough to count on the recycling of the U.S. trade/current account deficit to fund Treasury borrowing requirements. Now, however, with that amount approximating only $500 billion, it is obvious that the Chinese and other surplus nations cannot fund the deficit even if they were fully on board – which they are not. Someone else has got to write checks for up to $1.5 trillion additional Treasury notes and bonds...... (do read rest of Bill Gross letter here )

Henry Blodget acknowledged the debt issue back in May in his editorial on Business insider highlighting what John Mauldin had been saying.Why Are Rates Rising? Maybe Lenders Think We're Screwed

• Second, long-term rates are going up because traders are realizing that the world's big economies will need to issue trillions of dollars of new debt to pay for all their deficit spending...and there's just not enough dumb money in the world. Put differently, where is all this money going to come from?
  
  John Mauldin ran some numbers on this over the weekend. The US is in trouble. Japan's in trouble. Germany's in trouble. The UK's in trouble. Spain is in trouble. European banks are in trouble. All of the aforementioned countries, including the US, will be running deficits of over 10% a year, likely for several years to try to stave off economic collapse.
  
  The US deficit alone will eat $1.8 trillion next year, forcing the US to issue $1.8 trillion of new debt. When you go out a few years and add in the other countries, the amount of new money required gets very big very fast. And, again, the big question is...where is that money going to come from?
  
  Here's John Mauldin:
  
  The world is going to have to fund multiple trillions in debt over the next several years. Pick a number. I think $5 trillion sounds about right. $3 trillion is in the cards for the US alone, if current projections are right.
  
  The US trade deficit is now down to under $350 billion a year. The Fed can monetize a trillion [buy debt directly from the Treasury, thus printing new money]. Maybe... US savings are going to go up, but where is the incentive to buy ten-year debt at 3.5%? Four-year debt under 2% doesn't do much for your savings growth. Even with monetization and the Chinese buying our debt with the dollars we send them, that still leaves the bond market about $1.5 trillion short, give or take $100 billion...
  
  I think the bond market is looking at the mountain of debt that will have to be somehow sold and wondering where such a colossal sum will come from. Where do you find $10 trillion in the next ten years for US debt?
  
  And that is just for US government debt. $5 trillion for new global debt in the next two years? In a deleveraged world? How much will the other countries need? What about money needed for businesses and mortgages and credit cards and so on?
  
  If you add $10 trillion to the current $11.3 trillion (including Social Security trust funds, etc.), that totals $21 trillion in 2019. Let's be generous and suggest that interest rates will only be an average of 5%. That would be an interest-rate expense of over $1 trillion. That is 25% of projected revenues and 20% of expected expenses. And that assumes you have nominal growth of over 4% for the next ten years. If growth is less, tax revenues will be less.

Scary? Or perhaps you think that all these folks are simply singing the same tune.

Here is another set of opinion from famed Canadian fund manager Eric Sprott of Sprott Asset Management

Some bits of what Eric wrote...

• The US government raised $705 billion worth of new debt in 2008. The debt was raised to pay for a $455 billion budget deficit and $250 billion in “supplemental appropriations” for the wars in Iraq and Afghanistan. In 2009, the US government will (and must) sell $2.041 trillion in new debt. This debt will pay for a projected budget deficit of $1.845 trillion, supplemental appropriations of $196 billion for Iraq and Afghanistan, a fund for pandemic flu response and a line of credit to the IMF. In fiscal 2009, the United States must find buyers for almost three times the debt that was issued last year.
• Given the current state of the economy, it seems frighteningly apparent that a threefold increase in the debt purchased 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. To confirm this, we have grouped together similar debt holders in order to assess their potential buying capability for fiscal 2009, which ends on September 30th.
• 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. We’ve tabulated the numbers above - and they do not lie. ( source: here - recommended reading. :D )

And here is my favourite pun... Where Is Ze Moola babe?

How now my dearest brown cow?