The government bubble

September 14, 2009

Ed Yardeni gets it right, again:

Central banks, including the Fed, caused the housing bubble. Now they are once again conspiring to inflate the next bubble, i.e., the US Government Bubble. Over the past 12 months through August, they purchased $868.9bn of US Treasuries. Over this same period, the federal deficit totaled $1332.6bn and publicly-held federal debt soared $2005.0bn. This helps to explain the most recent conundrum in the bond market, i.e., why yields remain so low despite huge current and projected federal budget deficits.

The question is how much longer will foreign central banks be willing to fund so much of the US government’s deficit? By funding the housing bubble in the US, they were benefitting their exporters. Now, they are increasingly funding the expansion of the social welfare state in America. How will we ever be able to repay their generosity?

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