Free Markets, Free People

If borrowing and deficit spending are “the answer”, why don’t the bond markets agree?

All the unprecedented borrowing, spending and massive addition to the debt are building to a most unfortunate end:

In a fascinating dispatch Monday, Reuters reported that an interesting mix of corporate bonds have “yields” — rates of return — that have gone below that of Treasuries. (A bond’s yield corresponds to its risk: High-yield bonds are also known as “junk bonds,” while very safe bonds have very low yields.) The fact that Warren Buffett’s bonds are considered a safer bet than Tim Geithner’s should have been sobering news, especially on the morning after Democrats in Congress sent President Obama a mastodon of a new spending program with a $2 trillion price tag. As hangover headaches go, this is going to be brutal, and investors apparently have more faith in Johnson & Johnson’s ability to sell Tylenol than in Washington’s ability to pay for it. Mitchell Stapley, an analyst with Fifth Third Asset Management, told Reuters that the numbers coming out of the bond market are a “slap upside the head of the government.” The fearful question is: How much harder does Washington need to get slapped before government comes to its senses?

You have to wonder. After Tuesday’s signing of the budget busting Obamacare, it seems pretty clear “never” is the case. But it is obvious that the bond market isn’t fooled. Soon the only “junk bonds” out there are going to be government bonds if the borrowing and spending spree continues. Also at risk is the country’s bond rating. Moody, who is usually slow to move on these sorts of ratings, couldn’t be more clear in the warning it has issued to the US – yeah, that’s right, not Cuba, not Venezuela, but to the United States of America:

“Growth alone will not resolve an increasingly complicated debt equation. Preserving debt affordability at levels consistent with AAA ratings will invariably require fiscal adjustments of a magnitude that, in some cases, will test social cohesion.”

As you might imagine they’re not talking about “fiscal adjustments” which will add to the debt such as Obamacare (the statement was issued prior to its passage). The language is pretty clear, cut spending (and borrowing) drastically, dramatically, to the point that it will “test social cohesion”, and you have a chance of keeping your bond rating and surviving fiscally.

Given the 10 year Obama budget deficit forecasts averaging about a trillion dollars a year, we ought to be in AA bond rating territory fairly soon. You can figure out the fiscal stability part from there.



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10 Responses to If borrowing and deficit spending are “the answer”, why don’t the bond markets agree?

  • Well, we’re just spending far too much on health care, Bruce. We’re going to have to cut back.

    “Mrs. Jackson, Mrs. Jackson, you’re next.”

    “She’s right here nurse, but she isn’t waking up. And she’s been smellin’ kinda funny these past few days.”

    “Next! Mr. Blandings. Mr. Blandings.”

  • McQWhy don’t the bond markets agree?

    Simple: they’re racists tools of the health insurance industry who oppose change because a black man is in the White House and they want people to die.  Oh, and they’re nazi teabaggers, too.

    / sarc

    Or it could be that, unlike Imeme and the Congress whose only experience with money is spending other peoples’ and begging for it to fund their reelection campaigns, the bond market people understand that a fiscal disaster the likes the world has never seen before is on the way.

  • This is the upside to being one-termers.  They just have to patch over the holes in the boat with duct tape & cross their fingers until the next administration which will likely be Republican. 

    I hate to even mention this in the off chance someone hasn’t thought of it.  But Obama could refinance our obligations with China or whoever from US currency into their currency for a kickback.  Something that would float him through the next 3 years while turning the one benefit from hyper inflation or currency devaluation into a huge liability. 

  • And what exactly did you all think those 401K’s were for?  YOUR retirement?

    • I stopped all contributions to my 401(k) a couple months ago and am currently trying to figure out how to get that money without outright forging documents (I’m 28 and gainfully employed).  I might die cold and hungry, but that is a risk I’m willing to take if the alternative is depending on a market-based 401(k) for retirement.  As I see it, the chances of the government destroying currency and markets between now and 31 years from now are much, MUCH larger than me not being able to acquire enough actual money and property to take care of myself and those I care about in my later years.  Especially since I have started already.

  • Of course the alternative is “running the printing presses” and that has a side benefit in that the statists can blame big corporations for jacking their prices and gouging.