Commentaries

Deficit hypocrisy

There’s something scary about big numbers. It’s one reason we in the media often like to put the biggest number we can find into a headline.

So it was no surprise that most media outlets went gaga over the Obama administration’s projection that the nation’s debt will grow by $9 trillion over the next decade. And sure enough, critics of the administration’s efforts to reform healthcare were quick to seize on that scary number as another reason to advocate doing nothing.

But without wading into the muck of the current debate over healthcare reform, it’s worth taking stock of just how much hypocrisy there is when it comes to the subject of government spending and those big bad deficits.

Let’s start with the Republicans. They talk a good game about reining in federal spending, but they bear as much responsibility as the Democrats for the nation’s $11 trillion in total debt.

It’s sometimes hard to remember that when President Clinton left office in January 2001, the federal budget actually was in surplus. Yet by the time President Bush left town, the federal government was running a nearly a $1 trillion deficit thanks to spending on the wars on Iraq and Afghanistan, the bank bailout and increased spending on prescription drug coverage for Medicare beneficiaries.

But the Republican deficit hawks didn’t really start squawking about government spending until President Obama took office and proposed a $700 billion stimulus package for the ailing economy.

In reality, no political party can claim title to being prudent fiscal managers. All that talk about reducing the deficit often is just a wedge issue that gets used by politicians — both Republican and Democratic — to score points and torpedo legislative proposals they oppose.

Treasury yields not adding up

What is going on with U.S. Treasury yields? Can nothing nudge them from their current low-laying perch? Something seems very out of whack, but let’s just agree not to call it a conundrum.

There’s plenty out there that should be ratcheting up interest rates. The U.S. stock market has been on fire, with the S&P 500 still hovering near its best levels since October, the White House is projecting $9 trillion in debt over the next 10 years,  the economy is showing signs of improvement (a bond very unfriendly development), and a flood of new debt is already washing over the U.S. Treasury market

In fact, the U.S. Treasury sold $42 billion of newly minted two-year notes on Tuesday with little trouble and will dump another $39 billion of five-year notes later today. And this after a record quarterly refunding, $75 billion big ones, hit the market just two weeks ago. Just how much supply does it take to convince investors to start charging higher interest rates?

The chart below shows the trajectory of the 10-year Treasury yield. The most recent peak of 3.85% was Aug. 7, before the refunding and before the Fed’s announcement on its Treasury purchase program winding down.  It’s about 40BPs lower now.

Compare this with the S&P 500. It closed at 1010 that day. It’s currently trading at 1031.