Busy week, kicked off with Tuesday’s sale of $58 billion in 3 year notes. Again, puzzling to me but some called it a good auction. The reality is that the interest rate needed to sell these notes was 4.47%, up sharply from last months 4.29%. Overall demand was a little higher than recent averages. Foreign buying was a little weak, but domestic buyers were very strong. The clear dynamic across recent auctions is that if the interest rate goes up there is strong demand.
Wednesday was more of the same, $39 billion of the key ten-year note, also described as a good auction, but only because demand was strong for the very high interest rate. If the ultimate interest rate were lower, demand would have been weak. And the high yield was 4.83%, once more up substantially from the prior month at 4.68%. That is a big jump in a month and the highest rate in twenty years. Buyers responded with above average overall demand, the highest in 10 years. And unlike the three year auction, for this one the foreign buyers took an bigger than usual portion of the auction. We can keep paying higher rates and get good demand for our debt, but all we are doing is making the deficit bigger due to interest payments and then selling even more debt to fund the deficits.
And the same dynamic on Friday for the $22 billion 30-year bond sale. Once more we saw the highest yield in 25 years, 5.31%, up from 5.21% last month, although slightly lower than anticipated. And investors were happy to bid for the bonds at that high rate; with both overall and foreign demand being above recent averages. The message continues to be that investors are happy to buy US debt as long as the interest rate keeps going up.
I would like to ask you why debt is bad? The opposite side of debt is savings and investment. By saying debt is bad aren’t you saying that savings and investment are bad that you desire the hoarding of resources instead of allowing other people to use your excess resources to make the world a better place?
A lot of people advocate paying higher taxes to pay for the good works of our government and the standard response is go ahead, you pay more in taxes. Actually they can. They do it by investing in the United States by buying bonds. Because of their patriotism and generosity the government gives them a gift in return (interest) which of course on which they have to pay taxes, at least at the Federal level.
The fact that individual and institutions are willing to give (save and invest) $40 trillion to the United States government should be celebrated not criticized.
In 1994 the Federal Reserve Bank of Kansas City held a meeting of a bunch of well known economists that discussed whether it was better for the economy and the American people to borrow to pay for the Good Works of government or to tax for that revenue. They published the report but I have not been able to find it. It was quite fascinating.
Succinctly, when you borrow the money all that money comes from people’s silos of savings and investment. It is their excess resources. It raises interest rates and squeezes out marginal investments. If you cannot pay 6% interest on a loan to buy a house you should not own a house.
To tax the money out of the economy that money comes out of the various silos of spending, people will get the money from reducing car money, food money, clothing money, and housing money, etc. This will depress the economy. Since we have progressive taxes the most productive producers will be taxed the most reducing their productivity. With interest rates low marginal and bad investment will proliferate. (Housing crisis anyone?)
There is absolutely no appetite in the United States to cut spending, SS Benefits or show any other fiscal restraint. Back in 1992 Ross Perot promised me that I didn’t have to worry because the Four Trillion-dollars in debt would destroy us all by 1994. Here we are 34 years later with the Forty Trillion-dollar debts and people are still saying we are all going to die. (Actually that is true but not this week I hope and not from the debt)
In ten years the debt will be $150 Trillion and you will still be promoting this Zombie Hoax. As a Federal Reserve official told me in 1992, “As long as the Fed keeps the right kind and right amount of money in circulation, all the rest is just numbers.”
Uhhh, there isn’t a single economist of any persuasion who isn’t alarmed at our debt. History amply shows that the number one cause of the decline of countries is excessive spending fueled by debt. Every single economic crisis has been caused by excessive debt for speculative purposes. Anyone who thinks the debt isn’t an issue is delusional. The only way the money supply affects it is that if the government tries to inflate the debt down, they can do that by excessive issuance of money, but the result is huge inflation which deters investment and saving, and the average person gets crushed. So please don’t believe for a second that we are not already doomed due to our debt pile and our unwillingness to do anything about it. Do you think it is just an accident that interest rates on federal debt are rising rapidly?