The Fate of Markets

How quickly things change.  Several weeks ago stock market investors were riding high.  On the first day of the month, the DOW finished the day at 13,279…its highest close since December 2007.

It was just a matter of time – or so it seemed – until the DOW punched through its October 9, 2007, all-time high of 14,164.  You could just feel it.  Nonetheless, some weren’t buying.  They were selling…

“Sell in May and go away,” said the old-timers.

Obviously, so far, this has been good advice for those who bothered to listen.  Since May 1 the DOW has buckled like an overloaded mule…dropping 6.3 percent.  Even so, things could get much worse…

According to economist, Marc Faber, if the stock market were to move up much further we could witness a 1987 style crash.  On top of that, author, Chris Martenson, thinks we’re about to have another 2008-style crisis.  We suppose we’ll soon find out if they’re right.

In the meantime, stocks aren’t the only thing falling.  Oil, gold, copper, house prices…they’ve been going down too.  Yet not everything is going down.  In fact, some things are going up…like U.S. government debt.

A Great Election Year Stalemate

Yesterday we couldn’t believe our eyes.  After a hectic day of meetings we noticed the 10-Year Treasury Note was yielding just 1.70 percent.  Remember, as treasury yields drop, prices rise.  Who in their right mind is willingly loaning the government money for 10-years at a yield of just 1.70 percent?

You’ll find the answer below…and it’ll likely send shivers up your spine.  But before we get there we must first provide some context…

Investors appear to be piling into treasuries for their perceived safety at just the moment the U.S. government is about to max out its credit card.  For example, on Tuesday, Treasury Secretary Tim Geithner warned that the U.S. government will likely hit its debt limit before the end of the year.

But, before Congress raises the debt limit, Republican House Speaker John Boehner wants spending cuts without tax increases.  Conversely, the Democrats want tax increases without spending cuts.  Certainly, this will become a great election year stalemate.  Quite frankly, it already has…

“It’s simply not acceptable to hold the American and global economy hostage to one party’s political ideology,” said White House Press Secretary, Jay Carney, on Wednesday.

Later in the day Republican Presidential Candidate, Mitt Romney, stood in front of a digital debt clock and said, “I find it incomprehensible that a president could come to office and call his predecessor’s record irresponsible and unpatriotic, and then do almost nothing to fix it and instead every year add more and more spending.”

Clearly, there will be some great political theater leading into the fall.  At some point, however, the debt ceiling debate will be moved from politics to markets…

The Fate of Markets

Ultimately, when push comes to shove Congress will cut a grand compromise at the 11th hour to raise the debt ceiling.  It happens every time.  You can count on it.

It doesn’t matter that the U.S. government’s broke.  Likewise it doesn’t matter that global capital markets will no longer fund the U.S. debt.  For in this modern age of tablet computers and Trident Layers’ gum, the Federal Reserve is patiently standing by and willing to supply the cash to keep the whole deranged shebang from coming undone.

Here, in Socratic Method, we’ll answer our earlier question with a question…

Did you know that last year the Federal Reserve bought 61 percent of the government debt issued by the Treasury Department?

No kidding, just ask former Treasury official Lawrence Goodman.  It really is quite unbelievable… But it makes sense when you consider that the 10-Year Treasury Note’s yielding just 1.70 percent.  Still, that’s not the half of it…

Do you know where the Federal Reserve gets the money to loan to the government?

The answer, unfortunately, is so awful we wish we didn’t have to ask the question…

The Fed just makes a notation in its ledger and – poof – from nothing, creates the money to finance the government’s mammoth budget gap.  Understandably, this cannot go on forever.  Eventually the dollar will conflagrate or treasury yields will rise uncontrollably.  That’s when the debt ceiling will no longer be something politicians can determine.

“Fate is nothing but the deeds committed in a prior state of existence,” said Ralph Waldo Emerson.

Alas, the dirty deeds committed will adjust fate accordingly.


MN Gordon
for Economic Prism

Return from The Fate of Markets to Economic Prism

This entry was posted in Government Debt, MN Gordon and tagged , , , , , , , , . Bookmark the permalink.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.