U.S. Treasury Bond Market Crash Not Stocks the Big Story of 2010

Let’s pretend the US is a company.

For starters, this company has a massive debt problem. The official number is $12 trillion and counting, which is roughly the equivalent of one year’s annual production. On the surface, that’s not TOO bad.
However, if you treat the US’s balance sheet according to Generally Accepted Accounting Principles (GAAP) you have to also consider future liabilities in the form of Social Security and Medicare, which puts total debt at $65 trillion: an amount equal to 5 years’ worth of production: a REAL issue.

A debt load of this size requires massive sales and cash flow to service it. However, the problem is that the company’s primary sales segment (tax receipts) is plummeting. Indeed, individual income tax receipts are down nearly 30% from last year (a year that the economy was already falling off a cliff). Similarly, corporate tax receipts are negative.
Now, the company has just gotten a new CEO (the old one left after racking up this massive debt load). However, rather than trimming the fat from the company, he’s decided to INCREASE its operating costs/ annual spend. So the company is now having to issue MORE debt (roughly $150 billion a month) at the same time that it is trying to roll some of its OLD debt over.

This MIGHT work if the company’s current debt holders (foreign governments, especially China and Japan), weren’t already beginning to doubt that they’d ever get their money back.

Indeed, a few weeks ago, the Treasury Department released its Treasury International Capital Data for October: the numbers showing foreign interest in new debt issuance. The following is a BIG deal:

Net foreign acquisition of long-term securities, taking into account adjustments, is estimated to have been $8.3 billion (Graham’s note: we’ve issued nearly $2 TRILLION in debt this year).