US Deficit

Zero Hedge: Bail Out For Dummies - Part 1

the U.S. deficit is increasing at a dramatic and unprecedented pace. The bulk of expenditures are currently going merely to fund the Bail Out program, in essence transferring U.S. sovereign issuance to the Fed's balance sheet which uses the newly minted cash to fund all the incremental and growing support programs. Currently only a small percentage of the guarantees are funded, and as we head to the full funding capacity on all the Bail Out programs ($8.8 trillion), Zero Hedge expects to see as much (not necessarily the full amount) as $7 trillion more of new Treasury issuance as the true "worth" of the assets is realized. All the debate over Agency, CRE, whole loan, etc. write downs are really just a drop in the bucket based on none other than the government's own estimate of just how bad things could really get eventually. In this context the Mark To Market debate is also moot, as is private participation in the PPIP, and the Stress Test: the scale of the problem is simply insurmountable using current mechanisms in place.

As more data emerges, Zero Hedge believe the real risk to the Bailout program is in fact the liability side of the balance sheet. The bottom line is that every dollar printed by the Treasury directly goes to fund (and dilute) a dollar in deposits, bypassing M1-M3. If the $8 trillion pool in total deposits realizes that it is supported by assets which even the government is saying are worth fractions on the dollar, the risk of a wholesale systemic bank run becomes unstoppable even with all the government backstops in place, as the latter will be contingent on continued willing recipients of those rapidly devaluing pieces of paper known as U.S. Treasuries and once that assumption is questioned or outright proven false, all bets are off.

big hat tip to Bank Of America for primary data.

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