How Soon Will the Global Government Debt Bubble Burst?

Conn Carroll / February 05, 2009

Last Friday Heritage fellow JD Foster detailed how President Barack Obama’s Trillion Dollar Debt Plan is destined to backfire:

This debt explosion is likely to raise interest rates significantly for government debt, thereby increasing interest costs for future generations. More troubling at the moment, this policy will increase interest rates for all private debt such as home mortgages, consumer loans, and business loans. The near-term consequences of this debt bubble will be a deeper recession, a longer recession, and a weaker eventual recovery.

Today the Financial Times reports:

The US Treasury on Wednesday opened the floodgates of government bond issuance, revealing plans for a record debt sale in February and more frequent auctions in the months to come.

The announcement came amid growing fears about US government deficits and sent the yield on the benchmark 10-year Treasury note rising to 2.95 per cent, up from just over 2 per cent at the end of December.
…
For Barack Obama’s administration, the step-up in borrowing costs comes as it is fighting to secure an $800bn-plus fiscal stimulus, and is likely to need many hundreds of billions more to fund a banking sector clean-up.

The Treasury Borrowing Advisory Committee expressed concern on Wednesday over the sharp jump in net borrowing needs – which market analysts estimate could reach $1,500bn to $2,500bn for the 2009 financial year.

Foster also predicted:

The global recession has caused deficits to balloon almost everywhere, and governments worldwide are considering their own massive programs to stimulate their economies. So the United States will be offering this great wave of federal debt to the credit markets while most other countries will be doing the same. Because interest rates are set on global markets, this even larger global wave of government debt is likely to have much greater interest rate effects than would be the case if the United States were acting alone.

From that same Financial Times report:

Traders are particularly concerned about the appetite for Treasuries among foreign investors, who hold more than half the outstanding $5,500bn in Treasury debt.

In recent years, demand for US government debt has been stoked by developing countries running huge trade surpluses with the US and recycling dollars by buying Treasuries. However, many are facing growing pressure to stimulate their own economies and are seeing their current account surpluses decline as global demand diminishes.