02.28.2010 0

Breaking Point

  • On: 03/26/2010 09:50:27
  • In: Fiscal Responsibility
  • By Robert Romano

    “There is some sort of breaking point. The federal government can’t keep expanding its borrowing without having to incur some costs.”—Thomas Girard, New York Life Investment Management.

    Barack Obama is bringing America to the breaking point. And time is rapidly running out to reverse course.

    Now that ObamaCare is the law of the land, the nation’s skyrocketing debt is set to grow at an alarming rate.

    Currently the U.S. has about $12.6 trillion in outstanding treasuries (i.e. debt) that will eventually have to be paid back. Another $2.43 trillion of debt treasuries will be sold this year, projects Bloomberg News. That’s more than it has ever sold in history, and about $521 billion more than the White House had projected the national debt would grow in 2010.

    Importantly, it’s also some $874 billion more than the projected budget deficit of $1.556 trillion for 2010. A good chunk of that is the amount that has to be paid back immediately on the principal owed.

    For now, the U.S. is able to pay off that principal through the sale of more treasuries. For now.

    Adding pressure to the debt, Social Security has begun cashing in part of its own $2.5 trillion in debt treasuries as it pays out more in benefits than it takes in via revenue, as reported by the AP.

    It gets worse. Writing for the Washington Examiner earlier this week, columnist Michael Barone cited some very bad news for the quality of U.S. treasuries: “[I]n recent weeks United States Treasury bonds have lost their status as the world’s safest investment. In February, Bloomberg News reports, Berkshire Hathaway sold two-year bonds with an interest rate lower than that on two-year Treasuries.”

    According to the Bloomberg report, the last time corporate bonds were safer than treasuries was the mid-1980’s.

    Barone notes, “A company run by a 79-year-old investor is a better credit risk, the markets are telling us, than the United States government. Buffett’s firm isn’t the only one. Procter & Gamble, Johnson & Johnson and Lowe’s have been borrowing money at cheaper rates than Uncle Sam.” What does that mean?

    Primarily, it means that markets are demanding higher interest rates for purchasing U.S. government debt, which is rising beyond sustainable means. In short, with $12.6 trillion in debt, the U.S. is rapidly becoming a bad investment.

    After being warned by Moody’s that the U.S. was “substantially” closer to being downgraded should it follow through on Obama’s ten-year budget program, Congress enacted the government takeover of health care anyway. Senate Republicans have estimated that it will cost some $2.5 trillion from 2014 to 2023 when its full implementation goes into effect.

    Barone points to even more bad news about ObamaCare: it won’t be deficit-neutral as promised in its first ten years. Former CBO Director Douglas Holtz-Eakin has projected that the plan will actually add $562 billion to deficits, even though it raises taxes by about that amount.

    Overall, Obama’s ten-year budgets will raise the national debt by another $10.6 trillion from 2011-2020. All of which will have to be borrowed in a climate in which interest rates will be rising.

    Making matters even worse, the U.S. is foolishly toying with a currency and trade war with China. At issue, Congress is seriously considering labeling China as a “currency manipulator” as a matter of national policy, risking much, according Nouriel Roubini. “Markets do not seem to be pricing in the potential consequences of the U.S. labeling China a currency manipulator, which could be significant even if both sides avoid taking immediate bilateral actions,” said Roubini

    China, for its part, has already leveled the same charge. According to the China Daily, “This laughable accusation exposes Washington’s conspiracy to mislead people from the real currency manipulator that has caused turbulences in the global financial market: the US.” So which is it?

    Continues the China Daily article, “When the global financial crisis began to careen at the start of last year, nearly every country turned to a ‘de-leveraging’ financial policy to reduce financial risk. But the US, by taking advantage of the dollar’s position as the world’s leading currency, attracted a large amount of capital back into the US to balance its financial debt.”

    That’s all true. The U.S. has more than doubled the money supply since 2007 when the crisis began. It has ratcheted up the sales of debt treasuries, as noted above. All this, to cover losses on mortgage-backed securities and derivatives that were caused by errant Federal Reserve, Fannie Mae, and Freddie Mac policies. Since the crisis began, Fannie and Freddie have been nationalized, and yet its $6.3 trillion balance sheet has not been incorporated to the U.S. budget.

    Nor have the full impacts of ObamaCare been felt. Despite promising cost savings, a reduction of annual deficits, and economic recovery, Obama is rapidly bringing the nation to its breaking point.

    It will mean higher taxes, higher interest rates, a weakened dollar, inflation, stagnate economic growth, and probable sovereign default.

    Something’s got to give. Either Washington will be restrained and its profligate spending reined in, or taxpayers will forever be shackled to a debt that can never be paid.

    Robert Romano is the Senior Editor of ALG News Bureau.

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