No Free Lunch

The extraordinary measures being taken by central and governments in an effort to stabilize create markets, and intervene in cases of prospective institutional insolvencies, will result in a huge funding need by these governments. In the United States, the Congressional Budget Office has estimated that the Budget for the United States will exceed $750 billion next year. Other estimates are for a U.S. budget deficit in excess of $1 trillion. This is before possible and probable additional costs for an economic stimulus package, $300-$400 billion, and other funding demands arising from this financial meltdown. Questions which should be of interest are: Where will this funding come from; and what be be the implications of funding these needs?

The United States has had the benefit of foreign sources of capital to meet its need of $60-$70 billion per month. This was prior to this financial meltdown and the new capital funding requirements ensuing. Countries like China, and petro-dollar beneficiaries were accomodating enough, for whatever reason, to meet these needs. If the U.S. budget deficit doubles, while probably not a strictly linear relationship, one might estimate that the capital funding requirements of the United States from foriegn capital sources might rise to $110-$120 billion per month. What would be the willingness, ability, and desirability of foreign capital sources to meet this need?

In the context of a global economic slowdown it would appear that foreign reserves of US $'s would diminish from decreases in exports as well as lower oil prices. This would leave less funds available for re-investment back into U.S. Government debt instruments. One might also expect that as the U.S. financial picture becomes more impaired by its crushing debt burden, potential investors may well look more closely at alternative choices, as well as the redeployment of capital back into their own countries. In any case, this suggests that in order to secure the funding necessary for ongoing operations, the costs, ie interest rates, will be pushed up my market conditions. As the United States and other central banks have become the "bailouters of last resort", who has the ability and willingness to bailout these governments and institutions? I suspect there is no one to do this. If so, this may well make the current financial meltdown look like a picnic on a nice spring day.

If the current operational strategies offered by Central Banks and governments are any indication, we might expect that a high interest rate environment(read impaired credit availability), in a severe recessionary environment would be unacceptable. It would then seem like the strategy of the printing press for the manufacturing of money would be the only feasible choice available. One might then conclude that despite this current period of asset deflation and a strengtening of the dollar, this may well be a period that is relatively short lived.

While there is no free lunch, there may well be soup lines.