Well, we finally got the news that Moodys has given the US a triple A rating for its debt obligation. This is primarily the Treasury notes and bills. Certainly since WWII the US has been the premier economy in the world and long considered the safe haven for money and the safest and most profitbable nation for investments in the world. What is really the news is that this is news at all. But times they are a-changing.
We have written before that the rates on the bench mark 10 year Tresaury has been rising at an alarming rate recently. When we first raised concerns it was still under 3% and had been as low as 2.5% a couple of months ago. Now is over 3.5%. That is an enormous rise in such a short period of time. The rate has been higher on occasion but so were most other rates at the time and when inflation was causing concern in the markets. Why is the rate shooting up so fast and so high? What does reading the tea leaves of the rate portend for our economic future.
Let’s start with the basic proposition that interest rates are a function of several things but one major component is risk. Perceived risk always makes the interest rate on any investment rise. The risk factors now facing our nation are obvious to those willing to take an objective look at matters. First there is the clear and demonstrable anti-business attitude from Washington. The rhetoric and actions out of Washington for months has been vilifying all business interest. Couple this with Government, Inc.’s intervention into the market place and you have genuine cause for concern. Government, Inc. is throwing away any pretense to following the rule of law but is embarked on a populist agenda to garner votes and approval from the great unwashed out in the hinterlands. That may be a great political strategy for the short term but it is an awful way to encourage business activity and a growing economy. The government is in the middle of our banking system, strong arming major industries to bow to the unions, see GM and Chrsyler, is moving rapidly into the insurance sector and has proposed numerous other steps into making our economy a centrally planned and controlled one.
Second we have the Cap and Tax proposals that are coming down the pike and that guarantee higher costs for virtually everything we use, not to mention much higher costs for all energy sources. That is coming on the heels of the health care overhaul which will be a tremendous drag on or economic growth. I know that some argue that getting the health care cost “under control” will save our economy money in the long run but we have to remember that we are only talking about shifting the costs, not reducing them. They will still be high and probably go higher with improved technology. It is just shifting the cost from the user of medical services to others.
Then we have to deal with the debt an printing money factor. We are running up debt into the trillions right now and we are printing money into the trillions at the same time. The world begins to wonder just how much debt we can handle. It is a fair question. Even governments can default on their loans and have many times in the past just as Argentina may do again in the near future. Much of our Treasury debt is being “bought” by the Federal Reserve. Where does the Federal Reserve get this money to buy those notes and bills? It prints it up. It has not received payments for any goods or services to generate this cash. The Federal Reserve is also printing money to buy billions of dollars worth of the mortgage backed securities. This is classic funny money. The world watches this and sanely concludes that we are becoming a greater risk as a debtor. Some are beginning to think they are better off buying bonds or notes from the emerging markets like China, India or even Brazil. For decades the emerging countries when they made a trade deal with each other would require that payments be made in US dollars or their equivalent. Now China and Brazil are starting to trade without that provision and likely will pay each other in their own currencies. That is another profound display of lack of faith in the US dollar and our debt obligations.
All of the above leads to the legitimate concern about inflation in the near future and the decline in value and respect for the US dollar. That money printed up by the Fed will be there. It had no economic basis behind it. It was done to “save” the banking system and to stimulate the economy. Once created that money can’t be simply withdrawn. It does diminish the worth of existing greenbacks. We are talking trillions in new debt and trillions in new printed money, not billions. I am not that smart a guy and there are scads of bright people out there who are obviously worried a great deal about the value of the US dollar and our debt. Some may say my ideas are all hogwash. Well, I would like to hear why the interest rates are going up if not for at least the reason outlined here. Yes, there can be some fluctuations in the rate but they are usually very small and over a much longer period of time; there can be technical reasons in the bond and mortgage markets or even the stock markets that will influence the rate but those factors at the moment should be pointing to a low rate of return on those 10 year notes not an increase. Irealize that the US debt is still considered a safe haven by investors around the world at the moment. But with the current world-wide recession that as the saying goes is faint praise.
The Moody rating is a joke of course. Moodys has been under intense criticism from the politicians since last year for their ratings on the sub prime loans. There have been hints of regulations on them and other new restrictions to their business model to be imposed by Government, Inc. and threats of lawsuits. We’ve seen how the government has bullied one business group after another for months now. Does anyone really think that Moody’s would downgrade the US debt at the moment regardless of what the hard numbers and economic indicators reveal? I don’t think they are that brave myself.
The GM bondholders are showing some grit. Good on ’em. In the law they are on a parity with the unions and should receive equal treatment. Anything less is a defeat for all who believe in the rule of law and oppose thuggery in government.