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Busch: Creative Financing With U.S. "Credit Card"

Wednesday, the US budget deficit came out and the monthly budget deficit was slightly better than expected at $164.4 billion for November. The erosion in the overall fiscal situation is being generated by increases in outlays due to the recession and the US Treasury recording TARPoutlays on a cash basis.

The Congressional Budget Office said that the budget worsened $41 billion in the first two months of FY09 without TARP included. Revenue was lower and expenditures were up with the FYTD budget at -401.6 billion and is estimated that it could reach $1 trillion.

Also, we had the US Federal Reserve kicking around the idea of issuing bonds themselves to help them manage their balance sheet. It has ballooned from $900 billion in August to $2.0 trillion today as the Fed has backstopped commercial paper, money-market funds, mortgage-backed securities and American International Group . The Fed can either sell its Treasury bonds or it can ask the US Treasury for the money. (Tsy issues debt and leaves it at the on deposit at the Fed for the Fed to use.) The Federal Reserve understands that financing these backstops will be challenging with the deteriorating fiscal situation at the federal level.

This deficit will get even worse with a stimulus program that could reach $700 billion. As the USA Today reports, "All that spending will push the federal share of the nation's $14.4 trillion economy to 25% or more—past the post-World War II record of 23.5% set in 1983, at the end of what was then the worst recession since the Depression." You'll hear more about "creative" financing by the US Treasury and Federal Reserve going forward as the amounts will be difficult to raise.

Today, an aide from President Bush said that the White House is willing to consider using TARPfunds for automakers. This sets a paradigm or structure for the new Congress and new US Treasury to utilize in 2009. This could mean that every industry under duress will have cause to ask for money from the US government. There is $350 billion left unasked for under TARP and it will certainly be gobbled up further increasing the deficits. It also means less money available for what it was intended for: stabilizing the US financial system.

How the US handles its fiscal stance will be of major concern for the markets in 2009. This is why we've seen keen interest in sovereign CDS as credit quality becomes a concern. So far, the world is giving the US Treasury and Federal Reserve the benefit of the doubt with their ability to manage this Herculean effort (think cleaning stables). However as the Fed engages in quantitative easing and further expands their balance sheet, the markets could re-evaluate the efforts of Bernanke and Geithner to keep this delicate balance.

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Andrew Busch

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Andrew B. Busch here
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