Wednesday, February 3, 2010

The Sovereign Debt Crisis: Money for Nothing

For the next 5 years, there will be $50-80bn per MONTH of U.S. Treasury maturities that will need to be rolled. That amount is just to refinance the existing marketable debt (e.g. not Social Security / Medicare "Trust Fund" obligations). It is safe to say that there won't be any budget surpluses in the foreseeable future so this monthly funding demand can only grow. As the U.S. government continues to run $1 trillion budget deficits, their fiscal imprudence requires additional funding of $80-100bn per month to finance current spending. There obviously has been a much stronger and persistent bid for treasuries than many market observers ever expected, but the resolve of these investors faced with massive monthly issuance leaves one to ponder the tipping point that finally results in primary dealers balking at the prospect of absorbing the majority of another treasury auction.

Regardless, all signs point to an impending “day of reckoning” where the most indebted governments must finally confront the untenable obligations they have hoisted upon the people. All of the "emergency" measures, "stimulus" packages, and new entitlements will only hasten the process as the final days of the spendthrift regimes draws near. The era of “Money For Nothing and chicks for free”,once celebrated by the band Dire Straits, will be nothing but nostalgia for those that lived the good life in the days of extravagance and a general lack of accountability.