Who Will Fund the Record $1.56 Trillion U.S. Deficit?

[Commonground]

By CHARLES HUGH SMITH
Posted 10:00 AM 03/18/10

With the U.S. heading for a record federal deficit this year, many are wondering just how much debt the country can stand. The Treasury Department forecasts a deficit of $1.56 trillion this year, breaking the $1.4 trillion record set just last year.

But will the U.S. be able to sell its massive deficit? In other words, who's willing to buy all those Treasury bonds? In previous years, the answer was easy: China, which has amassed an $889 billion trove of Treasuries, and Japan, which holds a $765 billion stash.

Those countries' investments may not be enough to support the 2010 deficit, however. Recently, China and Japan have reduced their Treasury holdings, and Chinese officials have expressed concerns about the long-term viability of the trillions in new Treasury debt.

-snip-

http://www.finance.aol.com/story/who-will-fund-the-record-1-56-trillion-u-s-deficit/19404100/

[Commonground]

Re: Who Will Fund the Record $1.56 Trillion U.S. Deficit?

excerpt from above article:

Situation May Not Be Sustainable

The situation is starkly different from 2007, when China was buying about 75% of all the Treasury bonds issued. Last year, the Federal Reserve was forced to step in as "the buyer of last resort."

And on top of selling the $1.6 trillion to fund this year's deficit, the Treasury must also sell new bonds to replace those that are set to mature.

All together, analysts at Morgan Stanley foresee a demand shortfall of $598 billion by June 2010, which would represent roughly one-third of the expected year's deficit. It's unclear how that deficit in deficit funding will be filled.

Will buyers who have shown reluctance to sink vast amounts of cash into T-Bills suddenly start soaking up trillions more in new Treasury debt at today's low yields? Or will the major purchaser be last year's "buyer of last resort," the Federal Reserve?

If that's the case, perhaps the more salient question would be: Is this backdoor system of funding the deficit through the Fed really sustainable over the long-term?