Bailing out uncle Sam could get nasty - Money Matters - livemint.com

Foreigners Bailing Out
Uncle Sam?

Bailing out uncle Sam could get nasty - Money Matters - livemint.comCould this be the turn in the bond market? The relief rally following the promised $700 billion (about Rs32 trillion) clean-up of Wall Street’s toxic waste lasted barely more than a trading day. Foreign investors may finally be cottoning on that they are bailing out Uncle Sam. With bonds and shares falling—and oil shooting up—this could get nasty.
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For most of this month, US treasury bond prices rose on the theory that, in the midst of a crisis, they were a safe haven. But, as Hank Paulson and Ben Bernanke have approved a bewildering array of ever more far-reaching bailouts, investors started adding up the numbers. Depending how you account for the quasi-nationalizations of Fannie Mae and Freddie Mac, the total cost is now well over $1 trillion—and possible several trillion dollars.
If Uncle Sam was rich, this might not matter too much. But the government’s deficit is already yawning as the result of a slowing economy. On conservative estimates, it will reach $450 billion next year. It doesn’t take a dire assumption to think it could top $1 trillion by 2010. What’s more, the country as a whole is still relying on funds from abroad to finance its trade gap. The current account deficit is running at $60 billion a month, a cool $720 billion annually.
From an international investor’s perspective, this is beginning to look worrying. Last week they were receiving a yield of only 3.4% for holding US government paper for 10 years. Even if inflation comes back under control and hovers around 3%, that doesn’t look like much compensation.