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Foreign Investors to Shun Treasuries Auctions by 2021 ... Blame USA Structural Deficits & Mounting National Debt

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The USA is headed for an inevitable Investor rebellion.  The social engineering agenda of the Pelosi/Reid/Obama Democrats is on a path that would double today's $13-Trillion USA National Debt by 2023, and triple it by 2030.  Already a staggering 101%, the ratio of National Debt to GDP is destined to cross the 200% threshold in 2030.  Most buyers of US Treasuries are unaware of these precise numbers, but they have had a sense for a while that the realities of compound interest will cause their eventually temporary withdrawal from the auctions ... to stage an intervention.

Left unimpeded, the rise in Debt interest, unfunded Social Security liabilities, Entitlements for Medicare/Medicaid and Universal Health Care would drive the National Debt to $73-Trillion over the next 30 years.  This target was $55-Trillion at the end of the Bush era.


On the very short term, there appears to be some relief.  Albeit the 2010 $1.5-Trillion Budget Deficit represents 12% of GDP, our analysis of CBO costing of the current Obama ten-year Budget indicates the ratio will decline to 5% by 2014.  This virtually guarantees future Treasury sales to both domestic & international investors over the next 12 months.

Not so pretty is the journey from 2015 onwards wherein the Deficit/GDP ratio is scheduled to a rocket to a horrendous 17% by 2040.  Somewhere along the way, Congress is likely to see the start of a shunning of Treasury sales.  Inevitably, even the offering of higher discounts fails to yield sufficient monies and a matching of funds environment will prevail.  In a diversionary strategy in play since February, Wall Street is engaged in faux outrage at the prospect of Greece's 13% Deficit/GDP ratio and finger-pointing at the PIIGS.  Well, an unrestrained American Federal Gov't is on a path that it "again" passing today's 12% threshold in 2033.  But next time it will not be a sanctioned spike, but rather a structural phenom with virtually no options for urgent corrective action.

The Pelosi-Reid-Obama Budget process has shone a light on the whole structural deficit issue that we've been raising awareness about for almost a decade.  The foundations crosses several administrations.  Hopefully, closer Media & think-tank scrutiny will spawn anticipatory action by a more fiscally responsible Congress.  Hey, at least they formed a non=partisan committed in March!  If not, current CBO data indicates that left unchecked, the annual Deficit rockets to $4.2-Trillion by 2040, $7-Trillion by 2050 & $23-Trillion by 2080.  Meanwhile, the National Debt surges to $127-Trillion & $544-Trillion respectively by the latter two dates.

Gratefully, this "would/could/might" scenario is a mere academic exercise.  If Congress fails to address this responsibly, most of the foreign and even some domestic players will simply withdraw and shun the Treasury Auctions that fund "the habit".  The dark and ominous path illustrated will be truncated when these Investors sense the Federal Gov't is approaching tipping points where they deem it prudent to exit the venue.

Weighing the USA's situation amid the international community, TrendLines Research judges such a Debt Crisis will occur upon the National Debt reaching 140% of GDP ... likely in 2021.  That's only eleven years away.  Even if the USA dodges that bullet by some fortune, a similar fate, via the Deficit Crisis, is also on the horizon ... when the annual Deficit again gets to 10% of GDP ... in 2026.

Clues to the proximity of another and almost inevitable American financial crisis are visible via the exchange rate of the USDollar.  Distrust of Congress & the Administration in addressing their Deficit/Debt responsibilities began in January 2002.  In the succeeding six years, the disfavoured currency fell 26% from its USA:EUR rate of 1.16.  The secular decline was interrupted by safe haven seekers during Russia's incursion into Georgia & the Liquidity Crisis; but the trend resumed in March 2009.  Mass withdrawal of foreign (and some domestic) buyers of Treasuries will be known to be imminent upon deterioration of the USA:EUR to 0.50 from today's 0.75 rate.

Present trajectory suggests this will happen before 2019.  A more aggressive scenario (reflected via our Barrel Meter) predicts an accelerated version of this crisis and has the Dollar plunging to 0.60 by 2011Q3 before promptly retreating.  Such a EURO spike would certainly act as a wake-up call for policy makers.

On the positive side, the string of Export records seen in 2006/2007 should resurface in 2011 as importers see nicer prices.  Manufacturing could also surprise when domestic consumers start to shun high priced foreign goods and associated ever increasing transportation costs of those products.

Backgrounder ~ The scenario above is defined by legacy legislation and ramifications of the Obama 2010-2020 Budget as interpreted by the CBO this week.  Over the long term, it will never be allowed to happen.  As we saw in Canada in the early 90's, program spending will be the eventual victim of these structural Budget Deficits.  Ever larger annual Debt Servicing forces the Gov't-of-the-day into a realm of cuts in services and/or the raising of taxes.  While populism affords the Obama Administration the ability to tax upper incomes today, eventually realities of the Laffer Curve will force policy makers to spread the taxation among the "other 95%" or pare back program spending.  One of the first taxes will be a 2% hike in payroll withholdings to rectify the expected shortfall in Social Security obligations from 2017 to 2057.

A modern economy cannot sustain structural Deficits forever.  Eventually, debt servicing becomes so great that it crowds out program spending.  This usually occurs when interest consumes 30% of revenues.  New Zealand, Canada & Argentina are empirical examples of jurisdictions having faced the wall.  Devaluation allows nations to re-price its exports to rejuvenate its export sector.  Germany, Japan & China have all traveled this road at some time.  With a Deficit/GDP ratio of 13%, Greece would be the natural "next" candidate ... but was shielded by the security blanket of the EURO.

Source: Congressional Budget Office  (Note: The extended-baseline scenario adheres closely to current law, following CBO’s 10-year baseline budget projections from 2009 to 2019 and then extending the baseline concept for the rest of the projection period. The alternative fiscal scenario deviates from CBO’s baseline projections, beginning in 2010, by incorporating some changes in policy that are widely expected to occur and that policymakers have regularly made in the past.)

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