A couple of months ago, we raised a question that John Mauldin has been hammering on: Where, exactly, is all the money that the world governments are borrowing going to come from?
According to Hayman Advisors (Kyle Bass’s firm in Dallas), the world’s Federal governments will issue $5 trillion of debt this year. That’s a lot. And the figure doesn’t include corporate and municipal borrowing.
Closer to home, where is the money that we’re borrowing going to come from? We’re borrowing a lot more than anyone else. As much as $3 trillion this year alone. Hayman thinks there just won’t be enough cash to cover this issuance, which could wreak havoc with interest rates.
Mauldin revisited these questions over the weekend, and he still doesn’t have any answers.
I have been writing for months that I don’t think the US can find $2 trillion dollars this year and then come back to the well for another $1.5 trillion next year without serious disruption in the markets. Where do you find that much money when all the rest of the world also wants to borrow massive amounts? How much are we talking about? The friendly folks at Hayman actually spent the time to add it all up. This is not a comforting graph.
The graph shows the US will need to issue $3 trillion in debt.
“Wait,” I asked, “I thought it was only 1.85” The answer is that the number has grown to almost $2 trillion (as I wrote it would). Then you need to add in off-budget items like TARP, state and municipal debt, etc. Pretty soon it adds up to another trillion. All told, Hayman estimates that the world will need to find $5.3 trillion in NEW government financing. Never mind the needs of corporations or individuals or commercial mortgages, etc.
I am still trying to get my head around this. Let’s hopefully assume that they made a mistake and it is “only” $4 trillion. Where do you find that kind of money in a global deleveraging recession?
The World Bank says that total world GDP in 2008 was $60 trillion (http://siteresources.worldbank.org/DATASTATISTICS/Resources/GDP.pdf).
That means we need to find almost 9% of world GDP to fund the new government debt. Gentle reader, this is a serious problem. And now the next chart. Remove sharp objects or take another drink.
This one is titled “The Potential Shortage of Capital to Fund Treasuries.” They take into account the need for corporate borrowing, new corporate equity issuance, real estate debt, capital inflows and outflows, household savings, etc.
Bottom line? There is simply not enough available capital under current conditions to do it all. Something has to give. More household savings? More foreign investment (flight to safety, as the rest of the world looks even worse)? Reduced corporate borrowing and thus less GDP growth? Higher rates to attract more foreign and US investment?
The combinations are infinite, but none of them bode well. Increased household savings means less consumer spending. To attract more foreign investment (in the amounts that will be needed) will mean higher rates. And this is 2009. What happens in 2010? And 2011?
One trillion dollars is 7% of US GDP. And we will be running trillion-dollar deficits for a very long time.
Just a thought: Do you want to be a senator or congressman running for office next year with unemployment nearing 11% (my estimate), with all of the problems mentioned above, and with a record of having voted for the largest unfunded deficits in history? It is going to be a very interesting election cycle.
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