The World Is Running Out Of Money

I found an interesting and scary article today discussing what is going to happen when various sovereign entities around the world cannot roll over (refiance) their debts in the future due to the bleak economic conditions. The US is being hit with a double-whammy of having to issue a shitload of new treasuries (think Obamas 787 billion dollar surplus, Obama's 410 billion dollar omnibus, TARP, TALF, and every other one of the Feds facilities) when the largest buyers of treasuries are curbing their purchases. China is spending money internally on their own surplus, and also trying to diversify away from the USD risk (lets face it, Bernanke is going to have to print his way out of this one). With oil back down from its astronomical levels, the Middle East and Russia have less USD they need to recycle into US Treasuries. Of course the US could always raise the coupons it pays on these bills, but that would create holes in future budgets due to servicing the debt at the higher interest rates:

From The Telegraph:

Unless this capital is forthcoming, a clutch of countries will prove unable to roll over their debts at a bearable cost. Those that cannot print money to tide them through, either because they no longer have a national currency (Ireland, Club Med), or because they borrowed abroad (East Europe), run the biggest risk of default.

Traders already whisper that some governments are buying their own debt through proxies at bond auctions to keep up illusions – not to be confused with transparent buying by central banks under quantitative easing. This cannot continue for long.

ooked easy for Western governments during the credit bubble, when China, Russia, emerging Asia, and petro-powers were accumulating $1.3 trillion a year in reserves, recycling this wealth back into US Treasuries and agency debt, or European bonds.

The tap has been turned off. These countries have become net sellers. Central bank holdings have fallen by $248bn to $6.7 trillion over the last six months. The oil crash has forced both Russia and Venezuela to slash reserves by a third. China let slip last week that it would use more of its $40bn monthly surplus to shore up growth at home and invest in harder assets – perhaps mining companies.

Where is the money going to come from ?

So where is the $6 trillion going to come from this year, and beyond? For now we must fall back on the Fed, the Bank of England, and fellow central banks, relying on QE (printing money) to pay for our schools, roads, and administration. It is necessary, alas, to stave off debt deflation. But it is also a slippery slope, as Fed hawks keep reminding their chairman Ben Bernanke.

Threadneedle Street may soon have to double its dose to £150bn, increasing the Gilt load that must eventually be fed back onto the market. The longer this goes on, the bigger the headache later. The Fed is in much the same bind. One wonders if Mr Bernanke regrets saying so blithely that Washington can create unlimited dollars "at essentially no cost".