Dealing With the Deficit

credit crashOnce again we were approaching a negative trading day on Tuesday, when magically the market was reversed during the last 45 minutes of trading. Today's ending was a very aggressive reversal, which is very suspect, considering the extremely low volume that has been taking place. Market movers are definitely active.

I have expressed my concerns with rising interest rates in previous posts. Much of this concern is tied not only with the Fed's decision to eventually raise rates, but also with the continual massive spending going on with the government. It seems like nowadays we don't even hear about details of government spending. Everyone is so focused on unemployment, home prices, and inflation. Although these are also important economic factors, massive deficit build up can be a big problem in an already severely weak economy.

The big problem with increasing the deficit during this time is that in turn credit begins to close. We started out by feeling a "credit crunch" in the early stages of the recession, which was tightening of the available lending in markets. However, as deficits are deepening, we are beginning to see credit actually taken from the consumer. Home loans are becoming due, as are small business and commercial real estate loans. Forget the "credit crunch", we are now experiencing the credit vacuum.

To show just how out of hand government borrowing is getting, below is a chart of the government issued debt, JUST FOR FEBRUARY! Just to give this perspective. During the years of Ronald Reagan, Reagan was criticized for indulging in far too much government spending. Well, February's $221 billion was more than Ronald Reagan added up the entire year of 1986, which was his worst year for the deficit. Yikes!

* $42 billion in 5-year notes,

* $32 billion in 7-year Treasury notes,

* $44 billion in 2-year notes,

* $8 billion in 30-year TIPS bonds,

* $28 billion of 6-month bills,

* $26 billion of 3-month bills,

* $31 billion of 4-week bills, and

* $25 billion of cash management bills.

Its crucial not to forget what Uncle Sam is doing with the budget, as it will most definitely affect us directly. Due to the massive government spending, signs of this massive deficit may have a pretty severe lag time, but do not be fooled, it will show its ugly face sooner or later. Happy Trading.


  1. Jonathan Says:

    Agree with you about uncle sam. The bonds are going to be interestng to watch in the coming years

    Kind regards,

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