06/29/11 Delray Beach, Florida – Fat guys can surprise you. They don’t move very fast. But they can be very agile intellectually.
That was how G.K. Chesterton was. Laurence Lindsay, former assistant to George W. Bush for economic policy, seems to be the same way. Slow on his feet, perhaps. But quick in his mind.
Writing in The Wall Street Journal, Lindsey delivers thoughts that might have come from The Daily Reckoning. First, he notes that the budget problems faced by Washington are larger than generally reported. Growth rates have been overestimated, he says, while interest costs and deficits have been grossly underestimated. When more realistic assumptions are plugged in to the numbers it adds more than $4 trillion in ‘budget costs’ over the next four years. He concludes:
Underestimating the long-term budget situation is an old game in Washington. But never have the numbers been this large.
There is no way to raise taxes enough to cover these problems. The tax-the-rich proposals of the Obama administration raise about $700 billion, less than a fifth of the budgetary consequences of the excess economic growth projected in their forecast. The whole $700 billion collected over 10 years would not even cover the difference in interest costs in any one year at the end of the decade between current rates and the average cost of Treasury borrowing over the last 20 years.
Only serious long-term spending reduction in the entitlement area can begin to address the nation’s deficit and debt problems. It should no longer be credible for our elected officials to hide the need for entitlement reforms behind rosy economic and budgetary assumptions. And while we should all hope for a deal that cuts spending and raises the debt ceiling to avoid a possible default, bondholders should be under no illusions.
Under current government policies and economic projections, they should be far more concerned about a return of their principal in 10 years than about any short-term delay in a coupon payment in August.
Yesterday, stocks rose. The Dow was up 145 points. Oil increased a little too. Gold stayed at $1,500.
Still no clear direction.
But the direction of the bond market for the last few months has been up. This appears to contradict Mr. Lindsey. QE2 is ending. Everybody knows it. The Fed was the world’s biggest customer for US debt – in some months buying two times as much debt as the US government issued. Now that the Fed’s buying program is coming to an end, shouldn’t bonds go down?
If the economy sinks the way we expect, Lindsey will appear to be a fool – for a while. That is, the Great Correction will intensify rather than go away. Bond yields will fall, not rise. Lenders will make money as bond prices go up, while stocks, employment, commodities, houses and almost all other assets go down.
People will say:
“See, everybody wants the US dollar. Everybody wants to buy US Treasury debt. It’s the only thing you can trust. Debt is not the problem. The problem is growth. That’s why we need QE3.”
This is probably the trap Mr. Market is setting. The Great Correction will prove to be more bad news for investors – except for those who have put their money in ‘safe’ US dollars…and US treasury debt. Gradually, investors will move more and more of their money out of ‘risky’ assets and into bonds. Then, Mr. Market can spring his trap. As Lindsey warns, that is when they will stop worrying about debt ceilings and Congressional budget talks. That is when they will realize that it is too late. That is when bond yields shoot up and bond prices fall. That is when investors regret having lent money to Washington.
How far ahead will that be? We wish we knew. But Bill Gross, who famously sold US bonds, could turn out to be years early.
Then, Mr. Market – the joker – will have such a laugh. All those people who tried to get away from risk…by moving to the dollar and US Treasury bonds…will get whacked.
Bill Bonner
for The Daily Reckoning
Bill Bonner
Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning. Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill’s daily reckonings from more than a decade: 1999-2010.
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I have been paying Social Security taxes for more than 40 years. Now the repubs are calling it an “entitlement program”.
We need a government in the US that represents the majority of the people, not just the top 2%.
Maybe we should give the Left a chance to see what they can do?
The repubs are the left….. don’t let the internecine squabbling within our one-party rulers fool you….. all of them are central-planning, centralizing, omnipotent-in-their-own-eyes statists. It is all about aggrandizing the state and diminishing the individual; it is always and only about building their own power….
You’ve been trying the left for at least two generations – how about we diminish the power of our megalomaniacal class and do way with the idea that if they just centrally planned better….. or pulled lever B instead of lever A…. it would all be better. How about we try freedom? It was a great idea – Once achieved, people just aren’t very good at keeping it.
The left is busy destroying the country right now. If you like high unemployment and a crashing dollar please vote accordingly. SS and Medicare will run out of money in a few years and the checks will stop. Reform it or let it fail.
My suggestion is to let anyone who wants their money back withdraw from the SS system and no more taxes on their earnings. Let the Americans who want SS have it and pay for it. Americans who want to manage their own money can have it back and invest it as they see fit.
Free markets, small government and individual liberty allow prosperity. Statism, Marxism, totalitarianism will make America like Cuba.
Bonds increasing in value is a tough call. I’ve sold all of my bonds (months ago), and I am short.
My reasoning is this: most bonds, like most gold, stocks, commodities, houses, cars, etc., are all bought on some type of margin (borrowed money).
There isn’t any money available for margin, if there is no QE(pick a number) because all available funds will be going to the Treasury to run the government. Have money to operate will be more important to Treasury than how much it costs or whether or not the private sector has margin to buy bonds, that are already in the secondary market. The government cares about new borrowing costs, not the value of bonds already in the market. Bill Gross can say this better than me. I’m a retired trash collector.
is this thing on?
The repubs are the left….. don’t let the internecine squabbling within our one-party rulers fool you….. all of them are central-planning, centralizing, omnipotent-in-their-own-eyes statists. It is all about aggrandizing the state and diminishing the individual; it is always and only about building their own power….
You’ve been trying the left for at least two generations – how about we diminish the power of our megalomaniacal class and do way with the idea that if they just centrally planned better….. or pulled lever B instead of lever A…. it would all be better. How about we try freedom? It was a great idea – Once achieved, people just aren’t very good at keeping it.
Tax the rich.
Pay your bills.
4 trillion wasted on wars but still SS has to go. I notice not one mention of cutting the gluttonous war machine and bring the legions home.
Poor Grandma,,, put out on the street for a cruise missile. Heck of a country
Well things will get better now that the Afghan central bank governor has fled to America and Bernanke is on his way to Kabul for job rotation. Or are we led to believe America is the safe haven for tyrannical central bankers from around the world?
Tax the rich.
Let Uncle Sam pay your bills.