A Sign of Things to Come . . .

Even the Left Are Getting Worried About Debt

The Chicago Tribune, normally a cheerleader for its native son, Barack Obama and a fan of left-wing, big government spending policies in general, has discovered a late case of anxiety over exploding government debt. But, better late than never, one could argue.

Debt is the Achilles heel of all Western societies. It is an inevitable outcome of the prevailing narcissism of demand rights, entitlement ideology, and a widely held belief in the State as Mother Superior. Debt is simply a result of a polity insisting upon consumption now, whilst leaving future generations to pick up the tab and be enslaved to pay it back. Because the present generation does not have to pay the price the more the merrier has been the attitude to debt to date.

Everybody knows that the debt burden of the US government it beyond imagination. Everybody knows that something will have to happen--sometime. But most people hope that the something will be faced by someone else--preferably those who are at present children, or yet to be born.

The Chicago Tribune, in a recent editorial called its readers' attention to a little signal of things to come. It referred to something potentially quite significant, albeit largely unnoticed. It turns out that recently, Berkshire Hathaway--the company owned by Warren Buffett, raised some capital in the US debt markets. Berkshire Hathaway was able to borrow at a lower interest rate than what the Federal Government has been able to secure.

Why is this significant? The Trib explains:

With federal budget deficits running wild, investors are growing uneasy at the idea of lending money to an institution that seems unable to stop spending beyond its means. Last month, something extraordinary happened: Two-year bonds offered by Berkshire Hathaway Inc. commanded lower yields than those offered by the U.S. government. As Bloomberg.com put it, "The bond market is saying that it's safer to lend to Warren Buffett than Barack Obama."

Normally government debt securities carry the lowest interest rates, because they are deemed to be the safest investments of all. In this case money lenders are saying they believe Berkshire Hathaway is a more safe and secure investment than the US government. Not only that, but investors apparently believe that the US government is a more risky investment over two years--which is a very short time frame. Surely not. The US government can tax and print money till the cows come home. This would be like investors in New Zealand believing it was safer to lend money to Telecom than to the NZ Government.

Berkshire Hathaway, after all, conceivably could make so many mistakes that it runs out of money and closes down. But the U.S. government is not about to run out of money, even if it keeps overspending.

Why not? First, it can appropriate more of its citizens' earnings through the tax system. Second, and more important, it can print money to pay its bills. Warren Buffett doesn't have those options.

Ah, yes--but there is a catch. There is something rotten in the state of Denmark, or on the Potomac, and investors have worked it out.

So it's hard to see why investors would be leery. Well, actually, it's not so hard: The federal government is digging itself deeper into debt every month and intends to keep doing so indefinitely.

The nonpartisan Congressional Budget Office offers a prognosis: "Under the president's budget, debt held by the public would grow from $7.5 trillion (53 percent of GDP) at the end of 2009 to $20.3 trillion (90 percent of GDP) at the end of 2020." Interest payments would quadruple.

The long-term problem here is not that the government eventually would default on its obligations. The danger is that it would create money to make those debts payable, a course that would lead to much higher inflation. Then, yields on even impeccable corporate bonds would climb with those of T-bills.

The economy would also suffer as businesses and households scrambled to cope with the disruptive effects of soaring prices. It would suffer again if and when the government decided to curb inflation by driving up interest rates — a step that virtually guarantees a sharp downturn.

Frightened investors may be wrong to think they're less likely to get their money back from the government than from Buffett's Berkshire.

But they're not wrong to be frightened.

Now, we suspect that the Trib has not got this quite right. After all, it's only two-year debt that is being discussed. Can the debt market really be reckoning that the US government's debt problems will explode within two years, so that inflation is going to ignite that quickly? Possibly it has more to do with the amount of government debt being issued, whereas Berkshire Hathaway debt-paper is pretty scare.

What is more significant is that the Trib is starting to focus on the national debt set to explode over the next six to ten years, and expressing the belief that people are right on the money to be frightened about it. And this from an Obama supporting, left-wing orientated, big-government-spending newspaper.

Signs of things to come.