Yes, Debt Matters

By Kevin Meyer

Over the last several weeks I've been contemplating how things have changed in my still relatively short lifetime… how the word "freedom" has somehow morphed to mean "I work so others get free stuff" or perhaps even better "I better stop working so I can get free stuff."  Personal accountability has gone out the window, an increasing number of people pay no taxes – coming dangerously close to the 51% tipping point where tax policy will be set by those who don't pay anything, and somehow all kinds of new "rights" have magically appeared in the Constitution.  Enough to make me want to take another constitutional.  Didn't we run away from another country a few hundred years ago because those kinds of policies were so stifling to individual achievement?  Basically let's drag everyone down to the same… uh "equal"… lowest common denominator.  Sort of like public education, but that's another diatribe.

But what has begun to bother me the most, as I contemplate investment strategy for my approaching retirement years, is the bizarre notion that debt and deficits don't matter.  First off, debt and deficits are two completely different animals, and in moderation both can be useful temporary financial instruments.  Moderation and temporary being the operative words.  Both of which seem to have gone out the window when managed by people who have never had to sign a payroll check or figure out how to fund a fledgling business.  Those of us in the real world know better.

The concept of limitless and boundless deficit spending and the resultant public debt has been posited by the ilks of Paul Krugman and James Galbraith, which sort of tells you something right there.  The illusion of Nobel Prize intelligence is sort of dispelled when you learn that Paul's prize was for an esoteric piece of wisdom since proven incorrect and ironically what drove the initial outsourcing frenzy that cost so many jobs – and completely unrelated to the concepts he currently claims to be knowledgeable on.  And Galbraith has this bizarre concept that default is impossible if you control the sovereign currency.  Here's one of the more interesting lines:

With government, the risk of nonpayment does not exist. Government spends money (and pays interest) simply by typing numbers into a computer. Unlike private debtors, government does not need to have cash on hand.

Simple question: if that was the case, then why not just type an extra "5 trillion" into that computer and make each of us worth an extra million or so, and we'll handle our own healthcare.  Yeah, thought so.  Wouldn't quite be worth a million anymore, would it?  I guess little ole me just disproved a supposed world class economist.  Too easy.  Or two stupid?  Which one of us?

Money, even what remains of the value of the Dollar, is real, and its mismanagement has real socioeconomic consequences.  Just ask Greece.

Another concept oft-floated is that there's always a buyer for our debt, China must buy our debt, there's a vested mutual self-interest, and other such nonsense.  And that gets me to the news blurb that drove the neuron overflow this morning that prompted this rant.

A sudden drop-off in investor demand for U.S. Treasury notes is raising questions about whether interest rates will finally begin a march higher—a climb that would jack up the government’s borrowing costs and spell trouble for the fragile housing market.

For months, investors have focused their attention on the debt crisis in Europe, but there are signs the spotlight is turning to the ability of the U.S. to finance its own budget deficit.

This week, some investors turned up their noses at three big U.S. Treasury offerings. Demand was weak for a $44 billion 2-year-note auction on Tuesday, a $42 billion sale of 5-year debt on Wednesday and a $32 billion 7-year-note sale Thursday.

The poor demand, especially from foreign investors, sent the bonds’ prices sharply lower and yields higher.

Uh… wait.  Can't we just type more numbers into a computer?  Don't they HAVE to buy our bonds?  Since it's our sovereign currency don't we hold all the reigns?  Yeah, right.  And keep in mind that it just became tough to sell a few billion worth… and thanks to all these new "I want free stuff" programs we expect to add eight or nine trillion to the debt over the next ten years.  Purchased by who, or at what price?  And what happens to the magic pixie dust of government entitlement largesse if no one wants to buy the debt?  Or if they want "something" in exchange for buying that debt.

Is gold at a high price?  Really?