US Treasury forced to pay higher interest on bonds
It's been said over and over by those who have a basic understanding of money, investments, debt and, well, just basic math, that it wouldn't be long before the rapid increase in government borrowing and debt over the past year would catch up with us in terms of what that debt begins to cost the country.
Last week, the Treasury Department saw trouble on the horizon when it conducted the latest bond auction (which is a fancy way of saying "attempting to borrow money from investors and/or other countries").
NEW YORK (AP) - Weak demand at a Treasury bond auction touched off worries in the stock market Thursday about the government's ability to raise funds to fight the recession.
The government had to pay greater interest than expected in a sale of 30-year Treasurys. That is worrisome to traders because it could signal that it will become harder for Washington to finance its ambitious economic recovery plans. The higher interest rates also could push up costs for borrowing in areas like mortgages. ...
Of course you could just as easily replace the phrase "fight the recession" with "finance more big government spending that Obama plans".
The Wall Street Journal weighs in:
The weak demand reflected waning safe-haven buying, as well as concern that the Federal Reserve's aggressive efforts to revitalize the economy by increasing money supply may lead to a spike in inflation in the longer term....
Well, it got even better this week. Just as with all other bonds that are sold on the open market, our government's bonds are subject to being "rated" by companies that do that sort of thing to give potential investors a clue as to how safe the bonds are, how solid the financials of the bond issuer are, etc.. The problem? The balance sheet of the United States of America is a basket case - and getting worse by virtue of the policies of the people in charge.
Long before the current financial crisis, nearly two years ago, a little-noticed cloud darkened the horizon for the US government. It was ignored. But now that shadow, in the form of a warning from a top credit rating agency that the nation risked losing its triple A rating if it did not start putting its finances in order, is coming back to haunt us.
That warning from Moody's focused on the exploding healthcare and Social Security costs that threaten to engulf the federal government in debt over coming decades. The facts show we're in even worse shape now, and there are signs that confidence in America's ability to control its finances is eroding.
Prices have risen on credit default insurance on US government bonds, meaning it costs investors more to protect their investment in Treasury bonds against default than before the crisis hit. It even, briefly, cost more to buy protection on US government debt than on debt issued by McDonald's. Another warning sign has come from across the Pacific, where the Chinese premier and the head of the People's Bank of China have expressed concern about America's longer-term credit worthiness and the value of the dollar.
In other words, people who have money to loan are familiar with all the red ink we're running...and plan to continue to run, with pretty much no commitment to get our books in order. Meaning that some of them maybe are starting to think what a recent Rasmussen poll showed most Americans think - that the US government could go bankrupt.
As a result, our bonds are now running the risk of being downgraded from the top "AAA" rating they've had since 1917. Which means investors will ultimately demand higher interest rates in order to loan our government money...which means interest on our debt eats up a larger part of our budget...which means, you guessed it, someone's gonna' want to raise our taxes in the near future.
Higher interest rates and inflation. Can the Misery Index be far behind? Jimmy Carter, here we come!