SubscribeBond Vigilantes May Throw Wrench in Obama’s Plan
The bond vigilantes may be making a comeback.
A decade after forcing Bill Clinton to abandon his spending plans in favor of a balanced budget, investors in Treasuries are bedeviling President Barack Obama as he embarks on the most costly spending plan in U.S. history, driving up borrowing costs for the government and consumers.
Treasuries have lost 3.6 percent this year, their worst annual start since 1980, according to Merrill Lynch & Co.’s Treasury Master Index data. Yields climbed on longer-maturity debt in five of the past six weeks as bond prices fell amid concern that the Federal Reserve may not buy U.S. debt to keep yields low while the government increases its borrowing.
“The bond vigilantes are testing” the administration and Fed policy makers, said Tom di Galoma, managing director of government bonds at Jefferies & Co., a brokerage for institutional investors in New York.
“The scarcity and the fear that were driving the bond market are unwinding,” said E. Craig Coats Jr., the head of Salomon Brothers’ government securities desk when it was the world’s biggest bond trader.
Coats, who is now co-head of fixed income at Keefe, Bruyette & Woods Inc. in New York, said he considers himself one of the original vigilantes, the bearish traders who drove up long-term interest rates and persuaded Clinton to place deficit- reduction above fulfilling his spending promises.
My comment: The US government has no resources and creates nothing. It must coerce resources from citizens through taxation. However there are political limits on how high taxes can be raised. The government, if it wants to continue spending, must either borrow or debase the currency through money printing. I know quite a few uneducated people in our country think that alchemy can be done by the magic one but in fact lead cannot be turned into gold. Mr. Obama is going to be constrained by the market. If he tries to float this debt interest rates will soar. If he tries to print money to monetize the the debt the dollar will crash. Checkmate as they say. The best course of action is to to tell the Amerikan people that they are going to have to endure a severe recession or depression to compensate for all the high living that went on for the last ten years. After all the malinvestments have cleared the economy will again begin growing. However I am a realist and understand that this is a social democracy and the hoi polloi who are even more ignorant then people in government want somebody to do something. Politicians who are most afraid of appearing irrelevant, which for the most part they are, will be game to give it the old college try. It will not work and the market will have its way as it is more powerful then any government. The market can be mocked for only so long and then instead of 3 years of pain we may have 10-15 years of pain along with the possible destruction of the Republic. Gold is continuing to sniff this out as demand for a safe haven increase among those who understand what is really going on in the world.
John Polomny
The Real Deal
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