It all started back in April, when Standard & Poor’s warned that its AAA credit rating for the U.S. would be at risk unless the U.S. government came up with a plan to reduce the national debt and the annual budget deficit.
Last week, Moody’s Investors Service announced that it would place the U.S.’s “Triple A” credit rating under review unless the government made progress in increasing its debt limit by mid-July.
And, yesterday, Fitch Ratings said that it would downgrade U.S. Treasuries to “junk” if the U.S. government misses debt payments due August 15, 2011.
All this news about possible downgrades in the value of U.S. government bonds, and investors continue to flock to them?
Sure, there is a lot of politics going on behind the scenes. The Republicans who control the house want to flex their muscles and not agree to increase the government’s $14.3-trillion borrowing limit unless Obama’s Democrats give in to significant spending cuts. On the other side, I assume Obama’s Administration feels that the economy is too fragile to cut spending.
But here’s what’s really puzzling me and why I believe the herd chasing U.S. Treasuries will eventually get hurt.
In 2000, when the government was closest to running a budget surplus and when the national debt was actually going down, U.S. Treasuries yielded more than they yield today.
Think about this, because it is very important:
Today, the government is awash in debt. It spends $1.5 trillion to $1.6 trillion a year more than it takes in. The “official” national debt is $14.3 trillion, going to more than $20.0 trillion by the end of this decade. Just the interest on the debt is running at about $1.0 billion a day.
Yet, despite a government drowning in debt, U.S. Treasuries yield less today than they did 11 years ago, before the terrorist attacks, when this country’s finances were in much better shape than today—the Clinton Administration even claimed it had a budget surplus in the year 2000!
What’s wrong with this picture? It’s simple: fools are rushing in to buy U.S. Treasuries. And where the fools rush in, a slaughter usually follows.
Michael’s Personal Notes:
This is what he’ll do today…
At the end of their meeting today, Jean-Claude Trichet, the head of the European Central Bank (ECB), will announce that the 17-country ECB will keep interest rates unchanged at 1.25%. He’ll also set the stage…give the signal…interest rates will go up at the ECB’s next meeting in July.
Yes, the central bank in the European Economic Union is making the hard choice. It sees pathetic job growth in Europe, it sees the softening European economy…but it’s taking the high road…
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