Size of deficit is staggering

The size of the fiscal deficit will be huge for the next few years. The Congressional Budget Office produced their projections of the deficit which is usually more accurate than OMB. We are looking at over $1 trilli0n in fiscal 2009, but this does not include the new administration agenda which is supposed to be anywhere from $775 to $1 trillion plus over the next two to three years. Let's assume that the money is allocated as $400 billion in 2009, $400 billion in 2010 and $200 billion in 2011. This will mean that we will look at two years of over $1 trillion deficits and a 2011 number of approximately $750 billion. If the CBO is off by 10% and the recession lasts longer we could easily see the deficit being over or close to a trillion dollars every year of the Obama Administration.

So now the question is where is the financing going to come especially if foreign governments like the China will be borrowing or investing to help their own economies. Look at the size of the auctions that will have to take place. Quarter debt raising will have to exceed $250 billlion, more than the size of the annual deficit just two years ago. There will have to be longer-term debt issued but it will be at very low rates. This is unlike the 1980's when debt was issued at high coupons and provided a good opportunity for investors. The only way that this an be solved is through inflated the economy with the Fed buying more Treasury paper.