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Friday, March 26, 2010

Obama, Meet Reality aka The Bond Market

It's easy to vote to spend other people's money, especially when many of those people don't even exist yet. However, as Margaret Thatcher once said, "the problem with socialism is that eventually you run out of other people's money." Michael Barone reports:

...in recent weeks U.S. Treasury bonds have lost their status as the world's safest investment.

The numbers are pretty clear. In February, Bloomberg News reports, Berkshire Hathaway sold two-year bonds with an interest rate lower than that on two-year Treasuries. A company run by a 79-year-old investor is a better credit risk, the markets are telling us, than the U.S. government.

Buffett's firm isn't the only one. Procter & Gamble, Johnson & Johnson and Lowe's have been borrowing money at cheaper rates than Uncle Sam.

Equally ominous, is the fact that so-called swap spreads have gone negative. Businessweek reports:

The decline of U.S. interest rate swap spreads to the lowest levels on record reflects a shift in investor focus from the plight of financial institutions to the ability of nations to finance rising fiscal deficits.

The rate to exchange floating- for fixed-interest payments for 10 years this week fell below the comparable-maturity Treasury yield for the first time on March 23. The swap spread reached as low as negative 10.19 basis points today before reaching negative 7.63 basis points.

This means that investors believe that the risk of the U.S. Treasury defaulting on its debt is greater than the risk of private banks and corporations defaulting. Historically, treasuries have always yielded less than comparable private debt since the the U.S. government has the power to tax or simply print money to pay debt holders back. However, the recent passage of the health care entitlement on top of the trillion dollar stimulus bill on top of already record budget deficits is pushing the bond markets evaluation of the United States government to the brink. To add insult to injury, according to the New York Times:
This year, the system will pay out more in benefits than it receives in payroll taxes, an important threshold it was not expected to cross until at least 2016, according to the Congressional Budget Office.

Although the article rightly points out that the Social Security "Trust Fund" has a surplus of $2.5 trillion, as I recently discussed in my post Social Security Ponzi Scheme, An Offer You Can't Refuse, this surplus consists of non-negotiable IOUs held in a three ring binder at an office in West Virginia. In other words, the $2.5 trillion surplus is another outstanding debt of the United States government.

The fact that the government is reaching a stage where the market seriously questions its ability to repay these debts is an ominous sign indeed. Of course, this will not stop the Obama administration from pursuing its socialist agenda. On the heels of efforts to extend unemployment benefits to encourage people not to seek work, the Washington Post reports:
The Obama administration plans to overhaul how it is tackling the foreclosure crisis, in part by requiring lenders to temporarily slash or eliminate monthly mortgage payments for many borrowers who are unemployed, senior officials said Thursday.

In other words, the administration is looking for even more ways to redistribute the wealth and earnings of the productive and the future productive. For some philosophical background on why Obama will continue down this destructive path, see my post Why Liberals Don't Read their Bills, Evade their Constituents, but "Penetrate the Message Wars". In discussing the pragmatist philosophy of the modern left, I stated:
...at some level, the politicians believe that they can control reality. If they can form a consensus, condition people to accept their ideas, or "keep hope alive", they can make anything "work". Since anything is possible (as long as the right people are in charge), anything can be made to happen. The government can create prosperity by taking over auto companies and forcing them to make cars that no one wants. They can prop up toxic banks with money they create out of thin air. They can create prosperity by robbing the earnings of some to literally buy junk or "clunkers". They can stimulate prosperity by increasing the costs of energy. They can enslave doctors, increase quality, and decrease the cost of medical care all at the same time!
In part, I concluded:
...leftist ideology can be reduced to the following: People need to be ruled in order to effect outcomes that are consistent with the default morality of altruism or self-sacrifice. Why do people need to be ruled? Because, people will act in accordance with how they are conditioned by their group identity or by the unconscious assimilation of evil ideas. It is up to special philosopher-kings to rule (or "nudge") the masses in order to bring about desired behavior and outcomes, i.e., behavior untainted by the pursuit of selfish motivations leading to equal outcomes regardless of individual effort or character. Therefore, as long as a proposed bill is morally consistent with altruism and practically entails state control, the liberals will vote for it. The details are irrelevant.
Unfortunately for Obama, the details are not irrelevant to the one's loaning the money.


Mike said...

Shared on facebook. Our national rude awakening may be closer than people realize.

madmax said...

What do you think of William Stoddard's discussion of modern economic theory in comment #17 of this NoodleFood post:


That, in essence, modern economists are starting from an assumption of omniscience. The very thing that Von Mises showed is impossible.

The Rat Cap said...

Thanks for the link Mike.


I did read it and have a few comments - will leave them here in a bit.