Muchos Dolores...

Paul Craig Roberts in today's Counterpunch about how the economic stimulus package is going to be paid for, or not. It ain't pretty:

The federal government budget deficit for the 2009 fiscal year will be $2 trillion at a minimum. That is five times larger than the 2008 budget deficit.

How can the Treasury finance such a huge deficit?

There are three sources of financing. Possibly people will flee from stocks, bank deposits, and money market funds into Treasury “securities.” This would require a form of “money illusion” on the part of people. People would have to believe that investments can be printed, and that printing so many new Treasury bonds would not dilute the value of existing bonds or reduce their chance of redemption. They would have to believe that the bonds would be repaid with honest money, not by running the printing presses.

A second source of financing might be America’s foreign creditors. So far in our descent into massive debt foreigners have footed the bill. Our foreign creditors now hold very large amounts of US debt and other dollar-denominated “securities.” They are likely to develop a case of cold feet when they see a $2 trillion expansion in US debt in one year. Their most likely response will be to start selling their existing holdings.

Who would purchase them? The only way the Treasury can redeem the bonds that come due each year is by selling new bonds. Not only must the Treasury find purchasers for $2 trillion in new debt this year but also must find buyers for the bonds that must be sold in order to redeem old bonds that come due.

If foreigners cease buying and instead start selling from their existing holdings--China alone holds $500 billion in Treasury debt--a deluge will fall on an already flooded market.

The third source of financing is for the Federal Reserve to monetize the debt. In other words, the Treasury prints bonds and the Fed purchases them by printing money. The supply of money thus expands dramatically in relation to goods and services, and high inflation, possibly hyperinflation, would engulf America.

At that point the US dollar, if still on its feet, collapses. The import-dependent American population, dependent on imports for their mobility, their clothes, shoes, manufactured goods, and advanced technology products, no longer will be able to afford these imports.