The current piling up of US state debt and its consequences

Bailing out more and more banks and agencies plus fiscal stimuli, the US state deficit is continuously increasing. Obviously the treasury needs to issue more debt to finance these commitments.

There are various consequences ofthis development:

1. According to comments in the press, especially asian central banks and sovereign wealth funds alredy invested tons of their wealth in US Treasuries. These countries become increasingly dependent on the well-being of the USA and the US Dollar.
2. By thus increasing the leverage of the state, the original problem which made the bailout necessary in the first place is simply shifted from bank-level to state-level. The implications on US credit worthiness and potential implications on the US Dollar are quite obvious.


3. Currently the public and press reflects the dangers of Deflation. Deflationary tendencies are currently most obvious in financial assets and many commodities. However the cause is the ongoing shifting of risky assets into "safe" assets, such as US Treasuries plus some first realized losses. This deleveraging will continue to drive prices lower for quite some time.


4. We can probably assume that until then, the Fed as well as the Treasury will flood the Market with liquidity (wasn't that exactly the criticism directed at Greenspan for his policy after the burst of the internet bubble?). A lot of the liquidity is currently invested in safe haven assets (i.e. US Treasuries). Until these bonds mature, the liquidity is hence stashed away and should not directly lead to inflation. But what happens once these bonds mature, and the Treasury has to pay back all those houndreds of billions, i.e. pay it to the market? There will be a point in time when deflation switches into inflation and inflation will be massive.
   
   Watch the FT interview with Jim Rogers and invest into "real" assets! At some point some months down the line, Stocks might be a good choice to invest as well. But don't get fooled by bear-market rallies as today.
   

http://www.ft.com/cms/893ac9c8-757e-11dc-b7cb-0000779fd2ac.html?_i_referralObject=929363526&fromSearch=n