CNN has an interesting article asking a very obvious question: Where is the U.S. Government going to borrow all this money it wants to spend?

http://money.cnn.com/2009/02/13/news/economy/breaking_views.breakingviews/index.htm

Chinese doubts about the value of U.S. Treasury bonds highlight a crucial question: Who will buy the estimated $2.7-4.2 trillion of debt expected to be issued over the next two years? ...

Foreign buyers have absorbed a little over $200 billion of Treasurys annually, a useful contribution to financing the $459 billion 2008 deficit, but only a modest help towards the $1.35 trillion minimum average deficit forecast for 2009 and 2010.

Unless that changes substantially, there will be $1 trillion annually to be raised by the Treasury from domestic sources, more than double the previous record from domestic and foreign sources together, plus whatever is needed to bail out the banks.

Even if the U.S. savings rate were to rise from zero to its long-term average of 8% of disposable personal income, that would create only an additional $830 billion of savings - not enough to fund the domestic share of the deficit. Interest rates would probably have to rise substantially to pull in more foreign investors.

http://money.cnn.com/2009/02/13/markets/bondcenter/credit/index.htm

The Treasury market is particularly concerned about demand for U.S. debt from abroad. "The Chinese and Indians and a lot of countries are issuing a lot of debt to do their own stimulus packages, so the market is kind of nervous about who is going to buy all the supply we are going to be issuing," said Kalivas.

So, basically, foreign sources have only contributed about $200 billion annually to fund our deficit. But if our deficit goes consistently above $1.35 trillion--as it's projected to do--then that means we have a larger shortfall than Americans have to invest, even if they were to start saving at the historical average rate of 8%, that's still not enough to fund the expected deficit.

That probably means the Federal Reserve will start buying Treasury's--something it has indicated it would do to keep the Treasury market from being flooded and driving up interest rates. But that means we're essentially going to be printing money rather than borrowing it. Or, actually, we're going to borrow the money we can borrow... and print the rest.

Get ready for some inflation and/or a devaluation of the dollar once the economy turns around.

Update 3/13/09: China has expressed concern about the safety of their investments in U.S. Government debt:

China, the U.S. government's largest creditor, is 'worried' about its holdings of Treasuries and wants assurances that the investment is safe, Premier Wen Jiabao said.

'We have lent a huge amount of money to the United States,' Wen said at a press briefing in Beijing today. 'I request the U.S. to maintain its good credit, to honor its promises and to guarantee the safety of China's assets.'...

'Of course we are concerned about the safety of our assets,' Wen said after the annual meeting of the legislature. 'To be honest, I am a little bit worried.'

When your largest lender starts to express worry about the safety of the money they've already loaned you while you simultaneously ask to borrow many times as much money per year, things can get messy really quick.

Update 3/18/2009: This wasn't rocket science so I can't claim any oracle-like gift of prophecy, but the Federal Reserve on March 18th, 2009 did exactly what I predicted a month earlier...