Last week, with the passing of the healthcare bill, another crack in the foundation of the once sound US Economy occurred. Yet, almost no one noticed.
One or two cracks in a foundation won’t cause any immediate damage, but once there, these cracks typically are followed by others that are larger and appear more quickly than the first. After a period of time, the length of which depends on the external force being applied to the foundation, the foundation could begin to quickly deteriorate before finally collapsing from having ‘one crack too many’.
This past week, after the healthcare bill passed and was signed into law, evidence of another crack appeared. This from “Stock House” on March 29, 2010:
It should go down as a historic moment…
But hardly anyone noticed.
The same day the health care bill passed, U.S. government debt lost its “risk-free” status.
That day, for the first time in over a generation, the U.S. government was a worse credit risk than a U.S. company.
Specifically, investors were willing to accept a lower interest rate to lend money to billionaire Warren Buffett’s company, Berkshire Hathaway, for two years than to lend to the U.S. Treasury for the same period of time.
It shouldn’t be possible… after all, the government prints the money… how can it be less likely to pay off its debts? But it makes sense on the other side, too. You can easily see how billionaire Buffett’s company is less of an actual credit risk than our government, which is on the hook for tens of trillions of dollars of promises.
It’s not even just the world’s richest man who’s grabbing lower interest rates than Uncle Sam. Heck, even home-improvement store Lowe’s can borrow money at a cheaper rate than the U.S. government.
Here’s how my good friend Porter Stansberry explained it earlier this week:
Congress says by spending an extra $1 trillion on health care over the next 10 years and raising taxes substantially (but only on the wealthy, of course), our annual deficits can be reduced… This has to be one of the most outlandish claims we’ve ever seen politicians make. It will so surely end up being a financial disaster that the bond market has actually begun to price government obligations at higher interest rates than highly rated private companies…
We believe the debt of nearly every government in the world will soon trade at a significant premium to the best-run private companies.
The reason is quite simple: As long as they don’t have to pay for it, people will always vote for more government spending. That leads politicians to implement strategies that shield the true costs of government spending from the majority of voters – using debt and steeply progressive taxes. Today, roughly half of all Americans pay zero federal income taxes. As a result, it’s not hard to win an election promising more things, like “free” health care.
This isn’t really a political problem. It’s actually an economic problem. There’s a structural asymmetry between the people who approve the budgets (through elections) and the people who have to finance the budgets. Eventually, this will lead to a complete fiscal collapse. And it’s going to happen a lot sooner than people think because the bondholders aren’t stupid. They can see where the trend is heading. And that’s why, as of today, it costs OBAMA more to borrow money than Warren Buffett.
Hear that noise?
In my opinion, it’s the foundation cracking.
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