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From the Internet Newsletter Daily Reckoning.
REH
Our mouths hang open.
What kind of a mad, mad world is it we live in? Our subject today, dear reader, is bonds. U.S. Treasury bonds, to be precise. They are said to be safe investments. Are they? We are old enough to remember Eisenhower. Which means we should be old enough to know that the investment world is full of surprises. In fact, we rather enjoy them. That people should lose the most money from the most popular and fashionable investments seems not only natural to us, but fitting. That they should make the most profit from the most despised investments, too, seems right. It is as if the markets brought a little bit of the kingdom of God down to the ground, where the last are first and meek investors inherit the earth. Still, we shiver when we consider the current status of the most popular and fashionable investment today - U.S. treasury obligations. Peter G. Peterson - not to change the subject, but to elaborate upon it - is the worst kind of political hack. We have never met the man, but by reputation, he is honest, smart and earnest. Like Kurt Volker, former head of the Fed, Peterson is willing to look at numbers, speak his mind, and do what he thinks necessary to keep the system solvent. Were there more of his stripe in government, people might come to trust it. Fortunately, there are also men like George W. Bush and Alan Greenspan. We have been accused of having a bias against Bush and Greenspan. We deny the charge. We love them both, in roughly the same way and measure that we like performers on the hit show 'Jackass.' After so many years of putting up with mediocrities, it is a genuine relief to have such exceptional mountebanks in high office. And while a Peterson or a Volker might have supported the dollar with sound fiscal and monetary policies, thus sustaining the illusions of paper money for another generation or more, this dynamic duo seem ready to destroy the dollar right before our eyes. And the bond market, too. It should be fun to watch. "Among the bedrock principles that the Republican Party stood for since its origins in the 1850's," writes Peterson in the New York Times, "is the principle of fiscal stewardship - the idea that government should invest in posterity and safeguard future generations from unsustainable liabilities. It is a priority that has always attracted me to the party. At various times in our history (especially after wars), Republican leaders have honored this principle by advocating and legislating painful budgetary retrenchment, including both spending cuts and tax hikes. "Over the last quarter century, however, the Grand Old Party has abandoned these original convictions. Without ever renouncing stewardship itself - indeed, while talking incessantly about legacies, endowments, family values...and leaving 'no child behind' - the GOP leadership has by degrees come to embrace the very different notion that deficit spending is a sort of fiscal wonder drug. like taking aspirin, you should do it regularly just to stay healthy and do lots of it whenever you're feeling out of sorts." When George W. Bush took office, Peterson explains, the next 10 years were expected to produce a $5.6 trillion deficit. By the end of 2002, that number had been reduced to $1 trillion. More recently, the figure has sunk to minus $10 trillion; the national economy seems to be feeling more and more out of sorts. That is just the public debt. Private debt has risen, too. Altogether, corporate, individual and public non-financial debt rose from about 140% of GDP in the Eisenhower years to nearly 200% of GDP today. But when a team of economists set in motion by former Treasury secretary Paul O'Neill did a full exam, they found that public debt alone, including health and pension liabilities for the baby boomers, measured more than 400% of GDP...$44 trillion. Even more surprising than the diagnosis is the quack treatment now being applied, like leeches, on the collective economic body. Though the problem is clearly too much debt, too much credit, too much spending, too many deficits (budget and trade) and too many dollars...both Bush and Greenspan hold up a needle the size of jackhammer and squirt in more. Easy credit has seemed to produce such happy effects over the last 50 years. They cannot believe the near future will be unlike the recent past. And we cannot say that they are wrong. We merely note that their field of vision is remarkably short. If they merely looked across the Pacific, to Japan, they would see that producing stable, modest rates of inflation is harder than it looks. Or they could look across the Rio Plata, to Argentina. Or to America itself in the 1930s. Of course, we can anticipate their answer as well as you can: this is different. True; that it is. But though modern easy credit in the U.S. may be different in circumstance, it is not necessarily so in result. Today, the most astonishing thing about this mad investment world is neither the extremity of the U.S. financial condition, nor the absurdity of the official response. Perhaps at no time in the past has the U.S. balance sheet looked so bad. Still, investors are willing to lend the country money at the lowest yields in two generations. The two-year Treasury note yields only about 1.6%. A five-year note brings the lender only 2.9%. Adjusted for current inflation, the likely rate of return is about zero. Who in his right mind would make such an investment? Never before have investors had so much confidence in something that deserved so little. Bill Bonner Ed note: Bill Bonner is the founder and editor of The Daily Reckoning... |
