02/11/11 Baltimore, Maryland – US bonds fell yesterday. The feds borrowed more. The deficit for January was nearly $50 billion. The record for January was hit two years ago – $63 billion.
This puts the US on track for a record deficit of $1.5 trillion.
Wait a minute. This is the 5th year after the crisis began. You’d think federal finances would be getting back to normal. And normal means deficits of 2% or 3%, not 10%.
What gives? They cut taxes!
Associated Press has more of the details:
The Congressional Budget Office is projecting a record deficit of $1.5 trillion this budget year, which ends in September. The estimate was revised upward last month based on a tax-cut package brokered between the White House and Republicans that will add $400 billion to this year’s red ink.
That will mark the third consecutive year that the government’s deficit has been over $1 trillion, unprecedented imbalances that have been caused by the worst recession since the 1930s. That meant a sharp drop in government tax collections as millions of people lost their jobs while at the same time the government was boosting spending to stimulate the economy and stabilize the banking system.
Obama is facing GOP demands to slash billions from government programs as he prepares to unveil his budget for 2012 on Monday. That spending blueprint will contain a five-year freeze on many domestic government programs but GOP House members contend it is far too timid in slashing deficits. They are putting together a proposal for the current 2011 budget year that will trim spending by $32 billion, a downpayment on their pledge to roll total spending back to 2008 levels.
The feds are spending $1.50 for every dollar they collect in taxes. We have no comment on this kind of public finance program. Anything we could say, no matter how provocative or grotesque, is dwarfed by the facts.
But what is really puzzling is how they get away with it. Where are the bond vigilantes?
The funny thing is that if you believe the “recovery” story, you naturally think inflation will pick up and bonds will go down. You should be a vigilante. You should sell bonds. Bonds should go down.
If you don’t believe the recovery story, you can buy bonds without worrying. If the economy weakens, bonds should go up. Heck, the Fed will probably keep buying them, helping to keep prices high.
At least for a while. There’s the rub. There’s the itch. There’s the festering sore.
If the economy “recovers,” bonds go down.
If the economy doesn’t recover, the Feds buy bonds with dollars they created out of nowhere. Dollar holders everywhere – including those who own US Treasury bonds – should be alarmed. They should be vigilantes too.
Either way, sooner or later, bonds should go down.
The one thing that bothers us about this logic is the fact that so many people think it is true. Everyone now seems to expect stocks to rise and bonds to fall. What if it is the other way around?
Wouldn’t surprise us.
But what if you don’t like stocks or bonds? What if you think the whole damned capital structure is going to fall down? What if you think stocks will sink with the economy…and bonds will sink with the dollar?
Not necessarily in that order.
What do you do then?
You buy gold. You wait.
How long?
A year? Two years? Five years?
What’s the hurry?
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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Another great article by BB! As Tom Friedman wrote in a recent article, quoting Kasim Reed, “The bottom line is that for the country to do and to be what we have been … there must be a generation tough enough to stick out its chin and take the hit. … It is time to begin having the types of mature and honest conversations necessary to deal effectively with the new economic realities we are facing as a nation. We simply cannot keep kicking the can down the road.”
Bill,
I’m a long term audience, a buy and holder of gold since mid 60′s, silver from 71 to 80 and again since 2004, and 85 years old. Equally interesting to your market comentaries and especially the personal sidelights including the maturation of your kids has struck many chords. I can wait another five years for gold and the reshaping of America as we have know it. Thanks for your years of entertainment and knowledge.
Karl Ratzsch
If you listen to Tom Friedman, you’re a fool.
@Karl
First, congrads on getting to 85! It would be most interesting to hear if you consider PM’s an insurance, or an investment? I have to believe that at 85, investing for the long term has a whole new meaning!
The problem is, what should happen is not being permitted to happen through intervention and manipulation, to the tune of trillions of dollars. Bernanke has so stated- if stocks go high enough, the American consumer will feel better about their financial position, and once again begin to consume profligately.
Problem solved.
Consider the definition of value: what is it? How does one recognize it? Do the majority of firms listed on the SE’s contribute value? Is flipping a burger an industrial activity?
The Dow can hit 15,000 and those shares might sell for a price, and it would have even less value. The 42,000 US factories that have closed their doors since 2001 had value.
The value of something may not be recogizable until you realize you have lost it. Freedoms certainly seem to work that way.
The solution lies not in hubris to think we are the first to be, as someone once said, “tooken.”
Throughout history, there have been ways to protect and preserve what people have set aside in the face of governments and their creditors going fiscally berserk.
I’m going with history on this one.