Watch the Bond Market

It bears mentioning that not only were the grandiose goals of the Obama Administration never met, some Obama policies actually  produced results that were the opposite of those promised. Remember, for instance, that if you liked your doctor you would be able to keep your doctor? Or the promise that the cost of health insurance for the average family would decline about $2,500? 

Well we know how that worked out. Health insurance costs rose substantially, and plenty of people lost their doctors. The same story can be told about pretty much everything Obama touched. A sane person would go back and check the assumptions backing  the failed policies. 

But we are not talking about sanity. We are talking about the Biden Administration. They argue that the policy failures of the Obama Administration were not failures at all; the policies just didn’t go far enough. And the Biden Administration, we are told, has no intention of repeating that mistake. They are going to “go big” and repeat the failed policies of the Obama Administration. Except bigger. 

Hence the recently passed spending blow out, with more to come. 

Fans of the Democratic spending spree keep on insisting (1) that the U.S. economy is weak and needs stimulus and (2) the U.S. needs to spend additional huge amounts of money to get the population vaccinated against Covid-19. Further, they argue, interest rates are  exceptionally low so the cost of financing of all this spending is negligible. 

However, economic growth has been far stronger than almost anyone predicted. Going forward, Bank of America estimates growth for 2021 around 6% and 5% for 2022.  Similarly, the Fed projects GDP growth of 6.5% for 2021 with the unemployment rate dropping to 4.5%. Democrats surely know this, but in the spirit of never letting a crisis go to waste, they are going to spend every dime they can get their hands on, and then some.

While the Democrats claim this is needed stimulus, it is manifestly not so. The party simply passed a progressive policy wish list on a strict party line vote. 

Here it is also worth noting that as far as Covid relief is concerned, only about 5% of the spending is actually directed at immediate Covid relief. Not only that, the bill does not allow any states that receive federal money to reduce state and local taxes. This provision will probably be thrown out as a violation of the 10th amendment’s prohibition against the Congress commandeering state resources. Not that the U.S. Constitution holds much sway with progressives.  

What is truly interesting about all this is the reaction of the bond market. Net spending by all levels of government (federal, state, local) is going to amount to about $9 trillion this year. From February 2020 to February 2021, the national debt held by the public increased 25% rising from $17.4 trillion to $21.8 trillion. And that’s before the just passed $1.9 trillion in additional spending, all to be financed by borrowing. 

Responding to all this, the bond market has sold off substantially with some long rates tripling from their lows. The yield’s of both 10 year Treasury notes and 30 year Treasury bonds have risen more than 1 percentage point since the summer to 1.65% and 2.42% respectively. The auction of 7-year Treasury notes held on February 25, 2021 came close to failing.

If the Democrats continue with their irresponsible behavior, and all signs are that they will, it may not be Republicans they have to worry about. It may just be the bond market. If investors lose confidence in the willingness of the United States to tame its finances and control inflation, they will not be seduced by happy talk from the administration, much less the utterances of ignoramuses like Senators Elizabeth Warren and Bernie Sanders. 

Undisciplined fiscal policy, monetized by the Fed, presents the prospect of a collapsing dollar, rising inflation and soaring long-term interest rates. That’s what we experienced in the 1970s. It could happen again. 

JFB

The Enduring Fantasy of the Moderate Democrat

Congress is poised to pass President Biden’s spectacularly misnamed $1.9 trillion Covid Relief and Recovery Act. The bill will pass on a strict party line vote. And there is nothing moderate about it. Not only does the bill contain relatively little that actually addresses Covid-19, it will almost certainly delay the recovery, or at least make it less vigorous than it might have been. 

The reason is fairly simple. The bill, which essentially represents the enactment of a progressive wish list, actually pays people not to work. For instance, by adding $300 per week to State level unemployment benefits Congress made sure that plenty of people get paid more by staying home than by going to work. 

Not only that, the package is going to be financed by the issuance of more Treasury debt which the Fed is going to buy. In effect financing will be accomplished by monetizing the debt the way they do in other advanced economies. Like Zimbabwe for instance. 

Lest anyone think this particular $1.9 trillion package of pork is either sensible or a one-shot, it is worth thinking about a few things. First, Senator Bernie Sanders (D. Rolling Stone) is now chair of the Senate Budget Committee. He has already promised an additional $2 trillion for infrastructure spending. Second, the bill provides $86 billion in relief to bail out union pension funds on the brink of insolvency, thus divorcing performance from reward. In addition, they are providing a couple of hundred billion in relief to state and local governments even though some, like California, have experienced large increases in tax collections. Third, most of the $1.9 trillion will flow to government unions, a portion of which will find its way back to the coffers of the DNC. 

Thus far over the last year the Congress has appropriated something on the order of $3.4 trillion to Covid relief. Add this latest bill and the total comes to around $5.3 trillion. To put this in perspective, Covid relief, both real and in name only, now amounts to something like 25% of US GDP. Altogether the CBO now estimates that Federal outlays for 2020 will be around 32% of US GDP, up 11 percentage points from 2019. Public debt is projected to rise to 98% of GDP in 2020 and continue to rise through 2030 at which point it is expected to rise to 109% of GDP. 

One of the arguments that the bill’s champions advance is that financing all this spending won’t be a problem. The reason often cited is that interest rates are at historic lows which makes it relatively painless to borrow. There are lots of reasons why this is simply incorrect. 

The first is that market interest rates have risen substantially since that argument was first tested out. Back in August of 2020 the 10-year Treasury note yielded about 0.5%. Since then the rate has more than tripled to slightly over 1.5%. Second, if now is such a great time to borrow, private firms and individuals should be able to take advantage of the opportunity without being crowded out by government borrowing. Third, financing projects by borrowing doesn’t make them costless. It just shifts the time when the bill has to be paid in full. 

Fourth, it is worth noting in passing that there is a great con going on here.  Basically this gargantuan spending spree is not about the acquisition if goods and services. It just represents an enormous transfer of income from disfavored constituencies to favored constituencies. That is, to put it mildly, not a productive use of capital. Finally, by expanding its balance sheet to slightly over $7 trillion to accommodate the spending blowout, the Fed is planting the seeds of an upsurge in inflation, perhaps the cruelest tax on the poor that has ever been invented. 

It bears repeating that this bill is being passed on a strict party line vote. It will not receive a single Republican vote. It will receive the votes of all Democratic Senators and all but a couple of Democratic Congressman. It is blatantly partisan and there nothing moderate about it. 

The fantasy that there are moderate Democrats is belied by their actions. And there is more to come. 

JFB