Politics & Policy

Monday Morning Coming Down

Democrats partied hard on Sunday night, but Monday's markets should have sobered them up.

Who has better credit than Uncle Sam? If you ask the bond market, that elite list includes Berkshire Hathaway, Procter & Gamble, Lowe’s, Johnson & Johnson, and a host of other blue-chip corporate borrowers. The U.S. government has the ability to levy taxes on the largest national economy in the world, a vast and fearsome revenue-collection apparatus, and more than two centuries of constitutional government under its belt. P&G has Tampax.

In a fascinating dispatch Monday, Reuters reported that an interesting mix of corporate bonds have “yields” — rates of return — that have gone below that of Treasuries. (A bond’s yield corresponds to its risk: High-yield bonds are also known as “junk bonds,” while very safe bonds have very low yields.) The fact that Warren Buffett’s bonds are considered a safer bet than Tim Geithner’s should have been sobering news, especially on the morning after Democrats in Congress sent President Obama a mastodon of a new spending program with a $2 trillion price tag. As hangover headaches go, this is going to be brutal, and investors apparently have more faith in Johnson & Johnson’s ability to sell Tylenol than in Washington’s ability to pay for it. Mitchell Stapley, an analyst with Fifth Third Asset Management, told Reuters that the numbers coming out of the bond market are a “slap upside the head of the government.” The fearful question is: How much harder does Washington need to get slapped before government comes to its senses?

Winding up to deliver the next slap are the credit-rating agencies, the bond-graders who hand down the official word on how risky a debt is. Moody’s has been jumping up and down warning that the United States, along with France, Germany, and the United Kingdom, is headed toward losing its purportedly bulletproof AAA bond rating. A smaller credit-rating agency, Brazil’s SR Rating, made a splash in May when it decided to downgrade U.S. Treasuries from AAA to AA. The move was derided as a stunt at the time, and Tim Geithner is on the record as saying there is “not a chance” the United States will lose its gold-plated rating, but Moody’s cannot be dismissed so easily.

It takes a lot to get Moody’s attention: The major credit-rating agencies are not famous for being the most proactive or far-sighted guys in the financial world. They are the geniuses who kept putting investment-grade ratings on all that toxic subprime junk that nearly took down the world’s credit markets. And back when Enron was still doing a passable impression of a going concern, the big credit-raters kept giving it AAA grades — nothing to see here, folks! — while the markets had driven its share price down almost to zero. And here’s what sleepy Moody’s has to say: “Growth alone will not resolve an increasingly complicated debt equation. Preserving debt affordability at levels consistent with AAA ratings will invariably require fiscal adjustments of a magnitude that, in some cases, will test social cohesion.” Tighten in and focus on the words “fiscal adjustments.” This was pre-Obamacare: They didn’t mean that we should be spending even more money. When the big credit-rating agencies are concerned that your public finances are going Mad Max, it’s time to worry.

Another worrisome thing to bear in mind is that U.S. Treasuries, battered as they are, probably are being propped up a bit by the financial meltdown in Greece. Investors are looking for safe-ish places to park their money, and the major economies of the European Union face the possibility of excruciating instability if they don’t aid Greece and excruciating costs if they do. Jean-Claude Juncker of the International Monetary Fund made it clear over the weekend that the European Union will be on the hook for at least part of any Greek bailout — in classic bureaucratese, he says he expects “an inter-governmental agreement between the members of the euro zone, whereby bilateral aid is made available to Greece” – which means that France and Germany will be expected to do the heavy financial lifting. (It ain’t gonna be Slovakia.) So while U.S. Treasuries don’t look all that great as it is, it may be that they’d look even worse to investors if the next-best choices weren’t all saddled with Athens’s antics. But U.S. public finances are moving in the wrong direction, and it is not inconceivable that bond investors will at some point decide they have more faith in Angela Merkel’s commitment to fiscal discipline than in Barack Obama’s.

Our budget deficit is currently about 10 percent of GDP and going higher. Greece’s is 12.7 percent of GDP — significantly higher, sure, but not outrageously so. At the end of fiscal 2009, U.S. federal government debt equaled 83 percent of GDP, 53 percent of which is held by the public. (Another 30 percent is “intra-government” debt, meaning money owed to the mythical Social Security trust fund and the like. The usual approach is to talk only about publicly held debt and to pretend that the rest does not represent real obligations, which is malarkey.) But even that does not tell the whole story: Official government debt figures do not account for the Fannie Mae and Freddie Mac obligations taken on by the government, and those amount to $5 trillion, i.e. more than all 2009 federal spending. They also don’t count remaining liabilities related to the Wall Street bailout.

So here’s a prediction for you: Obamacare is not going to happen, regardless of the fact that the president is going to sign it into law today, regardless of what happens in the 2010 and 2012 elections, and regardless of any speech given anywhere in Washington. The government’s ability to simply say “Make it so!” and ignore economic reality is coming up against its limit. If Nancy Pelosi thinks the Republicans are obstructionists, wait until she wants to borrow money from people who don’t want to lend it to her and don’t have to run for reelection.

Obamacare will be a huge new outlay on an already bloated federal budget, two-thirds of which is committed to Social Security, Medicare, Medicaid, national defense, and interest payments on the national debt. Somebody’s not going to get paid. Bond investors are worried that it’s going to be them, but my bet is that it’s going to be those who have put their faith in Obamacare. But, hey, it was fun while it lasted. Have a Tylenol.

– Kevin Williamson is a deputy managing editor of National Review.


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