Barron’s hates America.
Trillions are no hyperbole. The Treasury is set to borrow $550 billion in the current quarter alone and $368 billion in the first quarter of 2009. “Near-term pressures on Treasury finances are much more intense than we had thought,” Goldman Sachs economists commented when the government announced its borrowing projections last week.
It may finally be catching up with Uncle Sam. That’s what the yield curve may be whispering. But some economists are too deaf, or dumb, to get it.
The yield curve simply is the graph of Treasury yields of increasing maturities, starting from one-month bills to 30-year bonds. The slope of the line typically is ascending — positive in math terms — because investors would want more to tie up their money for longer periods, all else being equal. Which it never is.
If they expect yields to rise in the future, they’ll want a bigger premium to commit to longer maturities. Otherwise, they’d rather stay short and wait for more generous yields later on. Conversely, if they think rates will fall, investors will want to lock in today’s yields for a longer period.
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Cutting through the technical jargon, the yield curve and the credit-default swaps market both indicate the markets are exacting a greater cost to lend to Uncle Sam. And it’s not because of anticipated recovery, which would reduce, not increase, the cost of insuring Treasury debt against default.
All of which suggests America’s credit line has its limits.
In other news…
WASHINGTON – In a stunning turnabout, the Bush administration Wednesday abandoned the original centerpiece of its $700 billion effort to rescue the financial system and said it will not use the money to purchase troubled bank assets. “Our assessment at this time is that this (the purchase of toxic assets) is not the most effective way to use funds,” Treasury Secretary Henry Paulson told a news conference. Paulson said the administration will continue to use $250 billion of the program to purchase stock in banks as a way to bolster their balance sheets and encourage them to resume more normal lending.
What will happen next on the US government soap opera? How many bald men will it take to rescue America’s financial system from total destruction? Who knows!? Stay tuned!
Theoretically, it is possible for the US to run a budget surplus again. Looking at a history of US budget deficits, it would not be without historical precedent to radically decrease government spending. It would lead unrest from the unions, but it could be managed.
Still, I don’t think it’s going to happen. At the same time, I am not certain enough of the US entering default within a certain span of time to actually buy credit-default swaps on the US government.
