August 31, 2009

Get your Treasuries while you can!

As the economy continues to stabilize overall and even return to growth in some sectors, Treasury's issuance of US debt is going to decline. Sharply.

OK, quit with the laughter, asshat... Here's the thesis:

1) Current deficits are being driven by war obligations (about to be sharply reduced), economic stimulus and infrastructure reconstruction. As the economy stabilizes, stimulus is going to stop as is infrastructure reconstruction (there's a limit to how much we can pump in for infrastructure in one year without causing inflation). The two combined with war obligations will dramatically reduce deficits.

2) Tax receipts will increase because of the economy and slightly higher tax rates. This will close the gap and put us back into surplus.

3) New issuance driven by SS and Medicare long term short falls won't be needed as the government steps up to make actuarial changes to the system to bring long term projections back to par.

As new issuance falls back, there will only be refinancings to look forward to. This may help explain why investors are so eager, despite our allegedly precarious financial position, to buy our debt. It's not just a safe haven, they're looking down the road to severely diminished supply.

Posted by mcblogger at August 31, 2009 09:28 AM

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