|
Washington, 0. The bond market, 1.
That’s the score folks, in case you haven’t been keeping track. The Federal Reserve Chairman said his $600 billion “QE2” program would lower interest rates. Instead, rates have done nothing but rise since investors got wind of the Treasury buying plan.
Then this week, Republicans in Congress — and the Obama administration — decided to kick Treasury holders while they’re down. They announced plans to cut estate taxes, lower payroll taxes, extend President Bush’s tax cuts for even the wealthiest citizens, and extend unemployment benefits for jobless Americans.
The catch? There’s no plan whatsoever to pay for any of it! The deal makes a total mockery of all that highfalutin language from the National Commission on Fiscal Responsibility and Reform.
Tallying Up the Losses
The bond market’s reaction has been swift and severe. Treasury bond prices plunged more than 2 points on Tuesday and another point-and-a-half the next day. That sent them to a six-month low.
The yield on the 10-year Treasury Note surged 21 basis points on Tuesday and another 15 on Wednesday. That brings its cumulative rise since October to 89 basis points!
What about shorter-term Treasuries? No solace there. The yield on the 5-year note has almost doubled — from 1.02 percent to 1.87 percent!
|
Municipals? If you bought these overvalued securities earlier this year when I said to avoid them, you’ve gotten hammered. Some muni bond funds have lost 7 percent, 8 percent, or 9 percent of their value in just a couple months.
Or what about STRIPS — bond market investments that are among the most sensitive to changes in interest rates? Hold on to your hats! The Vanguard Extended Duration Treasury ETF (EDV), which tracks the value of these investments, has plunged more than 21 percent since late August.
Budget Deficit Exploding as
Fiscal Sanity Sorely Lacking
I’ve already discussed how the Fed’s plan to support bond prices has been a dismal failure. So there’s no need to bang that drum too loudly right now. The new selling catalyst this week was the budget-busting bundle of tax and benefit goodies The New York Times dubbed a “back-door stimulus plan.”
Politicians on both sides of the aisle have paid a lot of lip service to cutting deficits. They’ve talked of the need for fiscal restraint. Some have pointed to the European debt crisis as a preview of what could happen here if we don’t get our house in order.
But what they’re SAYING and what they’re DOING are too completely different things. The latest package being discussed in Washington will likely cost more than $900 billion over the next two years. That’s on par with the cost of the previous “official” stimulus plan.
|
We don’t have the money, of course; so the budget deficit is going to explode once again. Credit Suisse now estimates the deficit will come in at a whopping $1.34 trillion in fiscal 2011. That’s after a $1.29 trillion deficit in 2010 and $1.42 trillion in red ink in 2009.
As the chart to the right clearly shows, Washington spending is out of control!
We were able to get away with this for a while. But now bond investors are demanding their pound of flesh. The cost of borrowing is climbing here in the U.S., just as it already surged in heavily indebted European nations.
My strategy? Continue to avoid long-term Treasuries during the “plunge” phase of this move. Or consider buying investments that rise in value as bonds fall.
Then once rates rise to reasonable levels, look to tentatively, selectively add exposure to fixed-income investments. That way you’ll lock in much juicier yields for the future.
Until next time,
Mike
P.S. This week on Money and Markets TV, we checked in on the health of the U.S. economy, and offered our prognosis for the pace of recovery in 2011. And I gave viewers my opinion on whether economic growth will speed up next year, plus a perspective on last week’s disappointing employment report.
If you missed last night’s episode of Money and Markets TV — or would like to see it again at your convenience — it’s now available at www.weissmoneynetwork.com.
{ 6 comments }
Mike,
I usually agree with your commentary but have to heartily disagree with your tax views. Giving everything we own in taxes would not slake the thirst of the compulsive spenders in Washington. It has been proven time and time again that they way to increase Government ‘income’ is to lower the tax and regulatory burden on business and citizenry while tightening the purse strings of government. This scenario works for the likely reason that we are taxed far to much and our government prints and spends far too much. Tax policy in regards to taxes collected is not a simple 1+1=2 scenario as you, and many in the current administration, seem to suggest. Beating the goose that lays the golden eggs until she increases production to satisfy unsatiable greed is hardly the best plan.
‘Fred’
Fred, your tax view isn’t supported by the facts available on the U.S. Treasury Dept’s web site. Let me acquaint you with those facts.
Consider the 28-year period from President Reagan’s 1981 inauguration day to President Obama’s 2009 inauguration day. Reagan inherited a $930 billion debt and then initiated tax-cutting “Reaganomics” supposedly to increase tax revenues and balance budgets. Instead, by President Obama’s inauguration day, budget defits had caused the debt to soar to $10.64 trillion.
Of that $9.7 trillion debt growth, three tax-cutting Republican presidents approved borrowing $8.16 trillion (84%) to fund twenty annual budget deficits. During Democrat Bill Clinton’s 8-year presidency, he approved borrowing $1.54 trillion (16%) to fund deficits.
Sure, tax revenues increased during those 28 years, but not because of tax cuts. The economy was boosted thanks to the huge military spending launched during Reagan’s cold war and perpetuated especially by hot wars during the Bush 1 and Bush 2 presidencies. But all that huge economy-boosting military spending was effectively funded by ever-growing borrowing and a soaring debt, Indeed, if it weren’t for today’s huge military spending funded by borrowing, the current Great Recesssion would be an even greater disaster.
If you dispute my facts based on Treasury Dept debt data, please provide the facts (and their source) supporting your view. Before replying, however, please determine how much of the federal government’s (actually taxpayers’) debt is due to growing military spending which taxpayers haven’t been required to patriotically fund with taxes.
Meanwhile, I proclaim that today’s Mike Larsen article should be forwarded to President Obama and all members of Congress with a note urging absolutely no tax cuts until the budget has been balanced and the debt repaid (since the government of the world’s economic superpower should be debt-free instead of being the world’s greatest superborrower). .
Dick,
Thanks for the interesting response. My contention is really quite simple, that deficits are first caused by spending. The government first needs to cut spending; frankly, I don’t trust them not to spend any increase in taxes and trust myself more than the government with my money. Policies such as rewarding poor management with bailouts, as I believed happened in the case of the banks and GM, is not something I believe encourages good business practices. Of course, I also believe that much of the real estate problem was caused by the government ‘encouraging’ loans to those who couldn’t repay them under the guise of ‘realizing the American dream.’ I don’t believe that the United States in the role of ‘world policeman’ is helping us balance the budget either. This is an immensely complex issue with many supportable angles. I certainly agree with your contention that we need to balance the budget and repay the debt, I just think we should concentrate on cutting spending rather than increasing taxes. I’ve found a lot of interesting information on our economic issues at the Heritage Foundation and also at Shadow Government Statistics, among many other places.
Fred,
Those we elect have to create an annual budget which includes both spending and revenue. But our presidents and members of Congress have annually ignored their fiduciary responsibility by refusing to levy sufficient taxes to fully fund their budgeted spending. Check Treasury’s web site and you’ll see that the last fiscal year that the debt didn’t increase was 1957. Making matters worse is that some presidential and congressional candidates promise revenue-reducing tax cuts (even during wars) which gets them lots of votes but, if implemented, only further increase deficits and the debt.
Based upon past decades of such fiscal irresponsibility, it’s understandable why you and others are concerned that the additional revenue from future tax increases would only be used to fund new spending. But we taxpayers and our news media are largely responsible for that problem. During election campaigns, we don’t insist that the deficit and debt problems be a top issue and how, if elected, they will correct the problems. Because the debt problem has become so huge ($13.8 trillion) and complex (see the report just released by the National Commission on Fiscal Responsibility and Reform), 2-minute candidate answers with 30-second opponent responses (i.e. sound bites) aren’t sufficient for an intelligent discussion by candidates for voters. Therefore, several, heavily advertised, lengthy candidate debates dedicated exclusively to the debt problem should be scheduled.
During the recent November 3 election the deficit was barely mentioned. And, in past State of the Union Addresses, I can’t recall any president informing Americans of the state of the government’s debt problem. All considered, it seems that the deficit and debt have been deliberately low-keyed (perhaps even censored) because its too complicated for the candidates, the news media and most voters and perhaps damaging to the stock market. Maybe the current controversy over extending Bush tax cuts for the wealthy will help to educate voters of the seriousness of today’s excessive debt, why the need for fiscal reform and responsibility, and make us more demanding of candidates and those already elected for effective and timely action.
Perhasp you noticed that Mike Larsen’s article today provided the internet link for accessing the Nat’l Commissions Report on Fiscal Responsibility & Reform. Other journalists and reporters should be doing the same because if Americans had been better informed since 1957 I doubt we would now have the crushing debt (the commission’s description) and its growing threat to our government’s fiscal solvency.
Suppose you decided to buy a new car, but you didn’t have the money to pay for it. But, you still somehow manage to get the car anyway “with no plan to pay for it†and then went out to try to find a job to pay for the new car. That’s how our federal government and some state governments have been operating. The sob story that there is no plan to “pay for any of†the extension of tax rate cuts is backwards thinking. The federal government has ramped up spending, the debt and the deficit (by cramming things down our throats and then criticizing us for choking on them) with the belief that they could then pay for their shiny new cars simply by grabbing new income tax dollars from “the richâ€.
If someone believed that they were going to get a raise in their income level in June, would it be a smart strategy to start spending that money as early as January? And come June if they didn’t get that raise, would it be proper for them to then claim that it “cost them†X number of dollars over a period of time? No, it wouldn’t. The truth would be that they over spent on money they only thought they would get.
Some are claiming that the proposed tax policy “will cost the federal government $900 billion over the next ten years†You, Mike, claim it will cost $900 billion “over the next two yearsâ€. Again, that is backwards thinking. Tax cuts, or in this case the possible extension of tax rate cuts, do not “cost†the federal government and don’t add to the deficit. Federal government spending adds to the federal deficit.
In case you haven’t been keeping track, and it’s obvious you haven’t, the Republicans did not “announce plans to cut estate taxes†but rather the issue is whether or not to reinstitute estate taxes. You probably knew that, but putting it in those terms doesn’t fit your agenda, so it works out better for you to deceive the reader. By the way, you can gain some solace in the knowledge that those filthy rich people will have their estates taxed upon death at a 35% rate if the current proposal goes into effect.
Furthermore, there were no “tax cuts†but rather there were “tax rate cutsâ€. And the argument isn’t about “giving tax cuts to the rich†but rather it’s about whether or not to raise tax rates on anybody, regardless of their income level. Surely you also know that distinction, being an economic genius. But hey, why let the truthful facts get in the way of a juicy story, right. It’s just easier to push your false agenda with a lie.
Interest rates should have never been allowed to exceed 9% from lenders.
Rents and mortgages should have never gone above $400. rents N $60,000 Mort
The banks started making all those loans to those latin american countries because our gov’t told them to knowing full well we would never get it back.
China pracically ownes us has bought a lot of us property and companies
many of our companies I bet are asian owned with american names and by the way I don’t have a problem with that. A family suffering in China or Japan is just as painful as a family in the US of A.
No one wants to admit that a capitalistic society doesn’t work for the working poor.