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.