Government Spending and the Market Doubling Milestone

We’ve been remiss. We made passing mention of a milestone yesterday, but failed to give it its due.

As of this week, the S&P 500 has doubled from its March 2009 low, the infamous 666.
The Wall Street Journal was quick to note that it took place in just 707 days – the fastest doubling of the S&P since 1936. Back then, it was a mere 501 days.

The Dow has a few hundred more points to go before it reaches the same milestone… but it’s climbed in less than two years from a low of 6,547 to 12,318 today:

Dow Since March 2009 Low

That, indeed, looks similar to a chart of the Dow from September 1934-October 1936. In just over two years, the Dow doubled from 87 to 174:

Dow Performance, Sept. 1934-Oct. 1936

What the Journal failed to note was what happened after that 100% climb in 1936. Let’s widen the scope a bit.

Dow Performance, Setp. 1934-March 1938

Ugh… After reaching that double in October 1936, the Dow topped out in March 1937… pulled back… came within about 5% of that top again in August 1937…and then plunged by March 1938 back to where it was three years before.

This was the infamous “Depression within the Depression.” As went the stock market, so went the economy. Whatever gains had been goosed by New Deal spending evaporated.

By 1939, Treasury Secretary Henry Morgenthau conceded to Congress: “We are spending more money than we have ever spent before, and it does not work… After eight years of this administration, we have just as much unemployment as when we started… and an enormous debt, to boot.”

We’re not saying history is destined to repeat itself. But the parallels are pretty obvious, and ominous. And there’s a modern-day twist.

“We will not be adding more to the national debt,” declared President Obama on Tuesday, speaking of his proposed 2012 budget, and its projections over the next 10 years.

“It’s loose rhetoric,” counters Robert Bixby, our Tab-drinking acquaintance from the Concord Coalition and I.O.U.S.A. fame. “It’s literally not true.”

See, the president is relying on the notion that spending would come into balance with revenues by 2017 – something he and his aides call “primary balance.” But their idea of spending excludes something very important – interest on the national debt.

That’s not insignificant. It was 4.6% of federal spending in fiscal 2010. But in the fantasy world of “primary balance,” it doesn’t count.

In the real world… and we’re using the White House’s own figures here… we’d still add $627 billion to the national debt in 2017, all in interest expense. By 2018, the annual cost of interest on the debt would exceed that of Medicare. And from 2017-2021, interest payments would total $4.5 trillion.

Which would balloon the national debt to $26.3 trillion. (As of this morning, it’s $14.1 trillion.)

Indeed, interest payments on the national debt will quadruple over the next decade… once again, that’s going by the White House’s own projections. It would amount to $2,500 for every man, woman, and child… per year.

And that’s assuming interest rates don’t rise dramatically. This most hilarious part of the White House projections is this: Rates on 10-year Treasury paper are supposed to climb from 3% this year to 3.6% next year… reaching 5.3% by 2017.

Um… Somebody should have picked up the phone to Tim Geithner before putting this out. Or maybe glanced up at CNBC. 10-year Treasuries have been around 3.6% all this week.

If the Chinese – who alone hold nearly 10% of all U.S. Treasury debt – decide the United States has become a bigger risk, for which they want higher rates to compensate, all bets are off.

If they realize the White House is so clueless as to assert today’s interest rates are 600 basis points lower than they actually are… they’ll demand those higher rates immediately.

Addison Wiggin
for The Daily Reckoning