Australia to borrow up to $300 Billion

Which is worse, the Mexican Flu or the Plague of the Black Debt?

Of 110 million people in Mexico, only 159 have died from 'flu' in a week, although the confirmed figures are a fraction of this. Those 159 still only translate as a annualised death rate of 0.74 deaths per 100,000 people. You have ten times as much chance of dieing by drowning. I am starting to think the 'H' stands for Hyped-up, and the 'N' for Non-event. The global response is bordering on hysterical. At least my bacon is going to be cheap for a while.

What poses far more risk to us all is the staggering amount of debt that continues to be assumed by Western governments. To give a benchmark for the following statistics, the Maastricht treaty, which created the European Union in 1993, defines a deficit spending of more than 3% of GDP as a reckless fiscal policy.

Australia's budget deficit will be revealed next month, and is expected to be 5% of GDP. This represents a $50 billion deficit. Compare that to last year's $22 billion surplus. Not a good look for K-Rudd's CV.

The statistics from my native UK are far worse. Alistair Darling's budget comes in at 12.5% of GDP! That's over four times the Maastricht treaty's definition of reckless. Whilst he was at it, he also increased the top tax rate to 50%, a figure he admits to having 'plucked out of thin air'. What a great way to run the nation's finances, and to encourage the top brains to stay in town.

The US is also playing with fire, running a deficit of 12.3% this year, followed by 9.6% next year. The US already carries a staggering $11.2 Trillion and rising of public debt, which is 74% of GDP. These two budgets will take it close to 100%.

It's no surprise that rating agencies have been warning these nations of the potential cost of these debts on their credit ratings. Kyran Curry, a sovereign risk analyst from S&P has warned that further weakening of both the current account deficit and fiscal deficit could cost us our AAA rating. David Uren, an economics correspondent for The Australian, could see this happening within two years.

That would mean higher borrowing costs for the foreign capital that is the lifeblood of Australia's economic growth. The Australian Office of Financial Management is currently hawking up to $1.4 Billion of bonds to investors each week, of which about $1 billion worth goes to overseas investors

And what of the $750 billion the G20 decided to raise for the IMF? The savings-rich BRIC nations (Brazil, Russia, India, China) wisely turned down the opportunity to foot the bill with their foreign reserves. So instead the IMF will be issuing bonds, which will be denominated in their quasi-currency of SDR (a basket of $US, GBP, Yen and Euros). This is a disaster for the US, and a result for China who recently proposed this as a global currency.

There has been speculation of a ratings downgrade for the UK government as well. Last month it faced the embarrassment of a failed £1.75 Billion bond-raising. Neither are good omens for their plans to borrow their way out of the crisis.

At a time that the US plans to issue record amounts of debt to fund the budget deficit, it seems that China, its largest creditor, is wisely starting to diversify away from the dollar. There is a real risk that the US will simply pay these staggering debts by printing money. China certainly thinks that might happen. In February, it dumped just under $1 billion of long-term notes, and with good reason.

Take a minute to read about Obama's ten year budget plan, released last week by the Congressional Budget office. The dollar's prospects look worse than ever. Look closely at the stats on the M1 money supply. It's rocketing. The current deflation is set to be washed away by an inflationary tsunami.

Martin Feldstein is the professor of Economics of Harvard University. Obama also closely listens to him, as he is the President Emeritus of the National Bureau of Economic Research. His view as outlined in London's Financial Times was that, "The unprecedented explosion of the US fiscal deficit raises the spectre of high future inflation".

Fed Spending and U.S. Confidence Both Up

There is a clear analogy between bad jazz musicians and the Federal Reserve. Both make a living by indulging themselves at the expense of their audience, with a seemingly endless performance of ad-hoc and ultimately pointless actions, serving only to leave the speechless onlooker with little more than a headache. Maybe Ben Bernanke should take up the trumpet.

The feds bail out the banks on Monday. On Tuesday, they take over the auto industry. By Wednesday, they're passing out money on Wall Street. These piecemeal actions will only serve to delay the creative destruction required to increase the productivity of the economy.

The US have now committed $US 13 trillion towards fruitlessly fighting the crisis. Fighting debt with debt. Treating a hangover with hair of the dog. As if that is not bad enough, the size of the spending has now led to numerous fraud and laundering accusations.

It seems surprising then that the US Conference Board has measured a rise in consumer confidence. That's easier to listen to than free style jazz, but does confidence pay the mortgage?