"The US government has already proved it can raise over $1.5 trillion in a year .."

Brad Setser:

The large deficit projected for fiscal 2009 stunned many. It is natural to wonder how such a huge deficit could be financed. But remember one thing: the US placed $1685 billion of Treasuries in the market in 2008 without pushing interest rates up.

Some facts.

In 2008, the stock of marketable public debt rose by $1257 billion.

The Fed’s holdings of Treasuries – counting the securities it has lent out to the market – fell by $427 billion.

That implies an absolutely huge increase in the stock of Treasury debt in the market. The outstanding stock of marketable Treasuries not held by the Fed rose from about $3795 billion to about $5480 billion.

All that debt had to be bought by the PBoC and other foreign central banks right?

Well, yes and no.

The Fed’s custodial holdings of Treasuries rose by $481 billion. That leaves $1.2 trillion of the $1.7 trillion increase in the stock of marketable Treasuries in the market in private hands. Foreign central banks don’t hold all their Treasuries at the Fed. Past data revisions – and a bit of extrapolation on my part – suggest that centrals bought $192 billion that doesn’t show up in the Fed’s custodial accounts. That implies a nearly $700 billion increase in central banks’ holdings of Treasuries.

That’s a record. And it is plausible in a world marked by record reserve growth (at least until the fourth quarter) and a flight to safety by central banks. It is way more than central banks bought in 2007. In 2007, the custodial holdings rose by $70 billion, with most of the rise in the official sector’s treasuries ($289 billion per my model which smooths the survey revisions over the course of the year AND tries to anticipate the impact of the June 2008 survey; $192.4 bilion in the Treasury data) came from central banks that weren’t using the Fed as custodian. Indeed, the 2007 increase in foreign central bank holdings ($289 billion) exceeded the increase in the stock of marketable Treasuries in the market ($247 billion).

But even if central banks bought about $700 billion of US treasuries in 2008, private investors also increased their holdings of Treasuries by over $1 trillion. In a year. That too is a record.

Some of those Treasuries were used to fund the Fed’s crisis lending, some funded the TARP and some funded the fiscal deficit. But in some sense it doesn’t matter. The market absorbed that huge increase in stock – and Treasuries even rallied in the process.

Facts are facts. The US has already proved it can raise over $1.5 trillion in a single year … without pushing yields up.

Of course, ability to the market to absorb this huge surge in outstanding Treasuries was a function of a crisis-induced panic and a scramble for liquidity and safety. And past performance is no guarantee of future results.

Brad's post on this is first rate. Highly recommend reading this post in full, but also his very well-informed blog at the Council on Foreign Relations.