Where Will Sovereign Stimulus Funding Come From?

Yesterday's equity market rise was allegedly due, in part, to hopes of China's stimulus plan and news of possible economic near-expansion.

However, I find this confusing.

We have recently experienced significant deleveraging in the private capital markets. Debt and equity prices are far below their year-ago levels. The S&P500 Index has declined more than 50% in the past year.

Now, with the destruction of capital values on a scale not seen in decades, two large governments intend to fund large spending programs with debt.

Who will buy this debt? Where is the money, given the significant capital losses of the past year?

Even my sixteen year-old daughter understands instinctively that if $1T is spent using mostly printed money, the dollar will be worth less. Of course, if buyers of US debt were found, their interest rate demands are almost certainly going to be crippling.

China and the US together tapping capital markets for between 1 and 2 trillion dollars is incomprehensible.

It's the equivalent of these two nations telling the world,

'We don't want our citizens to feel any pain whatsoever right now. So we're going to borrow or print several hundred billion dollars and dispense it to our people, giving them money on which to live, hoping it will restart our economies. Then, later, we'll buy the debt, yuan and dollars back.'

Why would anyone in their right mind by this idea? Or the debt to fund it?

It's ludicrous. Isn't it much more reasonable for governments to be cutting tax rates and letting people retain more of their own money? Perhaps local governments will have infrastructure projects which are economically viable.

But to engage in wasteful, nationwide spending as an excuse to spare citizens the pain of their earlier bad financial choices, on the face of it, cannot work in the long run.

Either the money will be wasted, and/or the immense debt loads, at high interest rates, will result in dampened GDP growth rates for a decade or more.

In the worst case, nobody can buy this debt, the spending is funded by printing presses, and inflation rates on a scale that will make the Carter era look tame may be with us. It would seem that there is simply not enough capital to fund these immense governmental spending plans and provide for private uses of capital at the same time.