Where Will Nine Trillion Dollars Come From?
Earlier today, White House officials said that they are expecting that the United States will have a cumulative deficit of $9 trillion dollars over the next decade (2010-2019).
This is about $2 trillion dollars higher than previously expected, and more in line with previously released estimates from the CBO (Congressional Budget Office).
If the United States does in fact tack an extra $9 trillion dollars on to its debt load by the end of 2019 (and there is no reason to think that they won't), then they will be sitting with a total national public debt figure of over $20 trillion dollars by the beginning of 2020.
Given these eye-popping deficit and debt totals that we can expect over the next decade, the question then becomes - who will lend us all of this money?
Let's look at the various ways that the United States has been able to borrow money in the past, and see if these might be sustainable in the future:
1. China and Japan. Over three trillion dollars of US debt is owned by foreign governments.
China and Japan are by far the largest holders of US debt - the two countries combined own nearly $1.5 trillion dollars in US debt.
China and Japan have been a great source of funding in the past, but we can't expect them to lend unlimited dollars to the United States in the future.
China, despite their fears about the diminishing value of the US dollar, will always buy at least some US debt as part of their strategy to stay diversified.
However, you can't expect them to have the same veracious appetite for US debt that they have had in the past. The Chinese are actively diversifying their portfolio, and this will come at the expense of the United States and their efforts to raise money.
You certainly can't blame the Chinese for being a bit more cautious, especially given the soaring deficits in the United States.
2. Intragovernmental borrowing. Did you know, for instance, that Social Security has lent the government over $2 trillion dollars?
If more money is contributed to Social Security than what is paid out, this money isn't squirreled away somewhere in some untouchable bank account.
Rather, the government basically writes an IOU to itself in the form of special series, non-marketable US bonds.
"Intragovernmental holdings" total just over $4.3 trillion dollars at this very moment, meaning that the United States government owes its various programs nearly $5 trillion dollars.
This has been a reliable source of funding for the government, but it won't continue forever.
There will come a time when, for instance, the government will be paying out more for Social Security than what it takes in. Trustees of the system recently said that this will begin to take place in 2016, a year earlier than expected.
Not only will the United States lose an important source of funds, they will have to also start making good on the money that they have borrowed from the different programs.
3. The public. Millions of Americans choose to invest in US bonds every year.
I would expect that the US government will become much more aggressive in terms of getting people to invest in bonds.
The Japanese government, for instance, is currently advertising on TV and in taxi cabs in an attempt to get its citizens to buy bonds. The average Japanese citizen has a great deal of savings (compared to other countries), and their government wants to get their hands on some of this money in the form of government-issued bonds.
I believe that this is a glimpse into the future in the United States - as sources of funding start to dry up, I believe that the government will become more aggressive in terms of marketing to its own people.
4. The printing presses. Can't borrow the money? Simply fire up the presses and print some more.
The problem with this? You crush the value of your currency and risk having sky-high inflation.
The Federal Reserve did this earlier in 2009, pumping $1.2 trillion dollars into the markets via purchases of government bonds and mortgage-related securities.
It's not like the Fed had this money sitting in a bank account - instead, they simply printed the money.
Warren Buffett talked about the dangers of turning to the printing presses earlier this week, and there will be big, big problems if the government has to resort to printing money to fund their future deficit budgets.
The bottom line? It's not going to be easy for the US government to borrow an additional $9 trillion dollars over the next 10 years, on top of the nearly $12 trillion dollars that it already owes, without turning to the printing presses.
Source: CNNPolitics.com - Obama administration projects $9 trillion deficit over 10 years
Filed under: The Economic Meltdown