Massive debts and deficits have already crushed the Greek bond market. Portugal, Ireland, Italy and Spain–the other members of what have come to be known as the PIIGS–are next in line. Yet another round of large-scale bailouts looms, this time focused on sovereign nations rather than troubled banks.
My concern is that many U.S. investors view the crisis as someone else’s problem. They believe it will stay bottled up in the PIIGS. They figure it doesn’t mean anything for U.S. bonds.
They couldn’t be more wrong. Here’s why. Just like the PIIGS, the U.S. is borrowing enormous amounts of money. Net issuance of government debt (new paper minus retirements) jumped from $922 billion in 2008 to $2.1 trillion in 2009 and could top $2.5 trillion this year. We are now selling almost $17 billion of new Treasuries a day, or $120 billion a week.
Just like the PIIGS, the U.S. is running massive budget deficits. Last year’s was $1.4 trillion, which is equal to 9.9% of our gross domestic product. This year it’s projected to hit $1.6 trillion, or 10.6% of GDP.
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