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Treasuries set for dramatic reappearance

The new era of a diminishing treasury debt has been shattered with the events of September 11. Now, the US government appears to be preparing for a vast expansion of public spending, heavily affecting dollar-denominated debt markets.

Eighteen months ago, it seemed as if the US capital markets had entered a new era, the principal characteristic of which was a shortage of treasury debt. The arrival of the Bush government earlier this year had already thrown into some doubt the continued existence of the surplus that had been created, but the picture has been completely changed by the events of September 11. The US government appears set for a vast expansion of public spending, and this will have important and comprehensive repercussions for dollar-denominated debt markets.

The US economy was wobbling before the attacks on the World Trade Centre, with many industry sectors suffering from the general slowdown. However, problems that were pressing before September 11 have now become overwhelming. The US government has signalled its commitment to do as much as it can to help as well as rebuild the shattered areas of downtown Manhattan. At the same time, it faces the cost of military campaigning and an extended war against terrorism. In these conditions, the much-vaunted surplus looks extremely vulnerable.

The enormous prosperity and unexpectedly large tax revenues of the 1990s allowed the US Treasury to replace a deficit of $290 trillion in 1992 with a surplus of $124 billion in 1999.

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