While the GDP revision came in slightly worse than expected at -5.7% Q1 growth, the main issue facing markets Friday is the potential for an inflationary environment spurred by U.S. Treasury rates increasing. The $2 Trillion of Treasury debt to be auctioned throughout the remainder of the year has frightened bond markets and equity markets alike due to lackluster auctions near the beginning of the cash raising cycle scheduled to pay for U.S. spending in 2009.
Most notable are longer term T-notes such as the 10 yr and 30 yr securities whose rates have risen dramatically due to commitments only from the U.S. Fed to buy $300 billion worth of the paper in a period where foreign sovereigns are less willing to finance the domestic stimulus overhaul. Most concerning is the reported 35% year over year decrease in government revenues in April, which will further pressure interest rates on U.S. debt.
It's almost as if the Treasury is a kid who just lost his job and decides to buy a plasma tv to add value to his lifestyle, but doesn't have the credit so gets his dad (the Fed) to co-sign for the debt. The gig might work for a while, causing a great deal of euphoria for the kid in the short run, but when the creditors (other countries) find out that Dad's credit is terrible and his earnings just decreased by 35%, they're going to spike the rates and bankrupt the whole family.
The hope is that we can spark an economic recovery and make up for lost revenues while increasing the growth rate, thus making the world comfortable with their investment and funding our spending. If we don't get that recovery, there will be REAL pain unseen since the 30's.
