According to the OECD or the Organization for Economic Co-operation and Development, the cost of borrowing requirements in 2009 will approximate $12 trillion dollars – the most since the 1930s in inflation-adjusted terms.

The United States will require about $1.8 trillion dollars or 15% of this total as the cost of financing massive bail-outs and fiscal spending plans sends its budget deficit into record territory through at least 2012.

In 2007, total OECD borrowing topped $9 trillion dollars and is projected to have risen to $10.6 trillion dollars in 2009.

The supply of government debt has already caused several European bond auctions to fail since last October or has significantly reduced the size of targeted auctions.

Germany, the second most liquid bond market in the world after the United States has already recorded at least four failed or reduced bond auctions since the fourth quarter. Other Euro-zone countries continue to struggle, including Greece, Ireland, Italy and Belgium and have been forced to pay investors higher rates of interest on their government-issued paper.

The United States, by far the world’s largest debtor nation, has not been immune to the trend in bond issuance saturation; over the last several weeks long-term Treasury bonds have struggled to raise auction targets – despite the Federal Reserve’s quantitative easing (QE) program, which essentially monetizes its own debt. Other countries have already started their own QE programs, including Switzerland, Canada and the United Kingdom.

The United Kingdom has especially been forced to pay higher interest rates for longer term financing as gilts or government debt markets struggle to raise auction targets. Britain is the worst casualty after Ireland among Western European nations with a bulging debt-to-GDP ratio now exceeding the size of its economy’s production.

Indeed, global bond yields have already begun to rise since last January as the intermediate and long-term segment of the yield curve has steepened, meaning interest rates are rising. What’s truly alarming about this recent increase in long-term rates is the fact it’s occurring despite aggressive central bank QE intervention.

In 2007, just as the sub-prime credit crisis was emerging, total government debt issuance in Japan, the United States and the Euro-zone stood at $18.5 trillion dollars – double the level compared to a decade earlier, according to the OECD.

One of the best speculations for aggressive investors is to short or bet against long-term government bonds.

The Sovereign Society’s Portfolio (TSI Portfolio) initiated this trade earlier in 2009 and continues to recommend buying a reverse-index long-term Treasury exchange-traded-fund to hedge bond market exposure. This trade can also be applied to the Euro-zone but only later this year as Europe remains behind the United States in this economic cycle.

Another excellent long-term hedge against huge government debt issuance and future inflation are TIPS or Treasury Inflation Protected Securities.

TIPS are the best value in government bonds right now amid deflation or falling inflation. Prices collapsed starting last July as commodities peaked and now project ten-year U.S. inflation averaging just 1.66% from now until 2019. The odds of the United States averaging a lowly 1.66% inflation rate over the next ten years is next to nil, considering the size and duration of debt issuance required to recapitalize the banking system and possibly, another Obama New Deal spending package later in 2010 or 2011.Inflation is now “on sale.”

For government bond investors the risk of heightened volatility is highly likely in the future as funding costs head to the Moon. The destruction of credit since 2007 and its subsequent replacement imply an inflation premium will arise at some point later in 2009 or in 2010.

Avoid intermediate and long-term government debt, buy TIPS and short or bet against 20-year and 30-year government bonds. Also, consider replacing intermediate government bonds with high quality non-financial investment-grade debt such as those issued by Néstle, Kraft Foods and General Mills – strong companies supported by organic cash-flow and low net debt levels.