The Washington buzzsaw is grinding on the following: A. Infrastructure for jobs spending, the American Society of Civil Engineers estimates the U.S. needs $1.6tn over five years to get the nation's infrastructure into good shape.
B. a second economic stimulus package of about $175bn — including tax rebates or tax credits aimed at creating jobs.
C. Cleaner Energy spending $150bn over 10 years.
D. reforming U.S. health care at $65bn a year.
These together add $465bn to an automatic $500bn approximate deficit inherited from 2008, giving a $1tn approximate budget deficit for 2009 (US Treasury announced that it will borrow $550bn in 4Q ’08). Since 2001, deficits add up to $2.1tn (gross of interest and debt repayments) including $455bn in fiscal 2008 (but excluding the budget element of TARP (which may be $250bn, not $700bn, the balance being short term roll-over T-bills). Goldman Sachs estimates that the US government will borrow $2tn — to finance an $850bn Federal deficit, to buy $500bn in bad assets and roll over $561bn in maturing Treasuries securities. Many people will rattle each others’ cages over this e.g. that 10-year Treasury yields have jumped from a low of 3.39% to a recent high of 4.08% and that indicates future rising inflation and cost of borrowing. But, given the deflation beckoning, keeping inflation up by a modest amount makes good sense. There is a view gaining traction in equity markets that 4-5 months stock market firming up above a P/e of 14 will be followed by another crash finding historic bottom at a P/e of 5 (based on today’s earnings)! This is worth taking pains to avoid. Some dyed in the wool monetarists want all the effort on interest rate cuts pass through to end borrowers, while others, the newbie and old Keynesians, want the maximum fiscal deficit spending boost. At the heart of both viewpoints, however, is the banks’ transmission mechanism. After seizing up in the interbank credit markets, it is now contracting severely for the underlying ‘real economy’.
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