T-Bill Glut Crowds Out Equity

Only this week the Treasury auctioned off another 71 billion of Treasury notes and bills.   That is a small part of the hundreds of billions they intend to issue during this calender year.  They have already issued over 300 billion this year to date.  In addition to that fact we have the Federal Reserve printing up about 2 trillion of new money that seemingly floated in from Mars.   It was mentioned here a couple of months ago that the rate on the long term 10 year Treasuries was going up and that was a bad omen for the future economy.  Then the rate was about 2.80% that return rate has now shot up to 3.16% in such a short time.  That is a very big move for those notes in that time frame.  Historically those notes move only a few basis points (hundreths of a per cent) in a month.  You please ponder a  moment what that jump in rates means.  I think it means a couple of things. 

First that the confidence level on the return is weakening.  We are creating too much debt and the ability to repay it is beginning to be questioned.  Some folks are asking that hard question–how WILL we repay all that debt.  It is like the little boy mentioning that the King has no clothes.   We can raise taxes, default or print up even more money.  None of those choices bode well for our economy or the strength of the US dollar.   Thus the concern by investors here and around the world.  Secondly, there is too much supply.  We are issuing so many of those notes that the demand can’t keep up.  Supply and demand does work regardless of your economic philosophy.  Even the Keyensians would agree with that.  Thirdly, the only reason the rate is not even higher is due to the weakness in the global economy and thus the desire for investors to seek a “safe” investment for the short run.  It is not that there is great faith in our Treasuries but we just happen to be the tallest midget at the moment, but that won’t last forever.   People apparently a lot smarter than me were concerned this week about how strong the demand would be for this week’s issue.  It held up.  But that tsunami of debt is still looming on the horizon and as it approaches closer and closer the concern level will rise.  It is not inconceivable at all that one fine day soon there will be a weekly auction where the demand is so low that the issue does not sell out in full.  You watch, when that happens Government, Inc. will put pressure on the banks it owns and regulates to buy up  some of the Treasuries to support that market.  They can always demand that the Federal Reserve buy even more but at a point that will be self-defeating because the market will be nervous about the Fed buying even more.  The Federal is already committed to buying hundreds of billions of those notes already.   The Fed buying those T-notes is the classic Ponzi scheme.  It is an artificial prop for that market and sooner or later the free market will not abide the sham.  Of course that assumes we will be permitted to maintain a free market.

Another problem with the Treasury issuing so many of these notes is that it swallows up whole huge amounts of capital that could otherwise be invested into the private businesses here and around the world.   The total amount of capital does change daily, but nevertheless at any point in time there is finite amount of it.  That 71 billion in Treasury notes is 71 billion that will not be invested in the next Microsoft for now.   At the same time Government, Inc. is wanting private money to be invested into the PIPP program to buy the toxic assets from the banks and also is seeking every way possible to raise taxes on business to fund the budget nirvana of the new guy.  Despite all the talk about “investment” by Government, Inc. we are not investing in our economy.   The government is desperately seeking ways to finance debt–pure and simple.  

All of the above is not the recipe for a growing and vibrant economy.  I welcome differing views.  But if you do, please give a detailed explanation for retiring our debt we are running up now.  I will even allow you to forget  for the moment the debts associated with Social Security and Medicare.  Just the 9.3 deficits of the new guy’s budget.  Do some math on it.  How high can taxes go?   Where does the new money come from to create new jobs and businesses, large and small?  Government, Inc. remember can’t create a darn thing unless it takes the resources out of our pockets first.  We can try to make a bigger pie, but will taking revenues from citizens increase the size of that pie or merely force everyone to button down the hatches and play hide and seek with the tax collector like they do as sport in Italy.

Keep your eye on the rate for those 10 year notes.  They are a harbinger of the future and a forecaster of confidence in the long run economy.  Short term there will be a bounce and the stock market will even continue its rally for a while.  But that debt is a fact of life and facts are always stubborn things.  I wish I believed differently but I worry that we haven’t reached the bottom yet.  As more and more people and investors realize the downside of our planned debt explosion the economy will contract and/or stumble along with very slow growth as  far as the eye can see because the debt is as far as the eye can see.  Either we reduce that debt or explain in plain language how we indeed to satisfy it or our economic future is so-so at best.  It could be much worse.  Some smart folks think we haven’t reached the “give up” stage yet in the current market turmoil where investors bail out because they see no hope.

Two new grandsons arrived last night.  I have been throught this many times with children and now grandchildren and it is always such a thrill.   It is for them these concerns are expressed.  I want those little guys to have the freedoms and opportunities my dad fought to preserve.

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