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By Mr. Curmudgeon:
Contrary to claims made by Occupy Wall Street mouth breathers, the markets are neither immoral nor moral – they are amoral. That’s to say, they don’t care where their money comes from – whether from government bailouts, stimulus spending, the Federal Reserve’s quantitative easing or profits gleaned from cheap consumer products made by China’s brutalized slave laborers. In other words, Wall Street is just like the “99%.”
Wednesday, the Dow Jones Industrials closed 308 points above its open on news GOP House Speaker John Boehner cobbled together a bipartisan coalition of big-government, big-spending politicians to pass a massive tax hike and spending measure to avoid the fiscal cliff – temporarily. In February, however, reality kicks in. That’s when the House begins grappling with the dreaded debt ceiling issue once again.
According to Treasury Secretary Timothy Geithner, Uncle Sam hit the debt roof ($16.4 trillion) last Dec. 26. With history as our guide, that means the bean counters at Treasury are borrowing against the massive federal worker’s pension fund to hold them over a few weeks. And market watchers are taking notice.
According to Reuters, credit-rating agency Moody’s Investor’s Service “expects that further fiscal measures are likely to be taken in coming months that would result in lower future budget deficits, which are necessary if the negative outlook on the government’s bond rating is to be returned to stable,” said Moody’s Senior Vice President Steven Hess.
Mr. Hess is whistling past the graveyard if he thinks Washington has any intention of lowering future budget deficits. And we must remember that last year Moody’s was overly optimistic America would deal with its debt problems when it allowed the U.S. to keep its AAA credit rating after Congress agreed to pile an additional $2 trillion onto the national debt without any meaningful deficit reduction. Standard & Poor’s, on the other hand, was far more realistic, downgrading U.S. sovereign debt to AA+.
And that is the point. America’s “safe haven” investment status ends with the demise of our “good faith and credit.” For now, the Federal Reserve is able to keep interest rates artificially low as a result of its $45 billion-a-month purchase of 10-year Treasuries. But as our debt increases, and the likelihood of repayment diminishes, investors will demand higher yields on U.S. Treasuries (the “risk premium”) to make it worth their while. And that risk increases with every junky downgrade.
Today, Greek 10-year junk – I mean bonds – offer 11.88% interest … any takers?