Are We Broke?: DC Alchemists Change US Debt from Gold into Tin (Part 2 of a Series)

March 23, 2010
By John

(This is another in a series of postings about the extent of US liabilities, their implications for our economy and personal wealth, and a path out of the mess we are in.)

Before we continue with Rough Truths’ detailed analysis of our nation’s financial situation, some facts emerged yesterday that show how the capital markets are already adjusting their expectations about the riskiness of ballooning US government debt.  This evidence underlines the case for near-term American insolvency – and is a warning shot that we should not ignore.    Indeed, the news was stunning – and potentially devastating – so of course it got almost no press at all.

Founders Gift of Good Credit Squandered

According an article entitled “Obama Pays More Than Buffett as U.S. Risks AAA Rating”, there are now a growing number of private US corporations whose borrowing costs are lower than those of the US Treasury. When I was in graduate school taking economics classes – more years ago than I’d like to admit – we learned about something called the ‘risk-free (interest) rate’ as being the amount of interest paid by the US Treasury for a note of a given term.  It was called ‘risk free’ because the global capital markets assumed the United States would always be able to meet its obligations (as it had been since Alexander Hamilton was George Washington’s Secretary of the Treasury).  The benefit to taxpayers was that their government’s sterling credit quality commanded the lowest interest rates available.  Most other debt issues were offered as a ‘Spread to Treasuries’ (in other words, they were priced at a risk-adjusted premium to the risk-free rate – so a great credit might only pay a few tenths of a point more interest than the government, while a junk-level credit might need to pay as much as 6-8% more than the government).

But now – with the US about to issue another $2.43-trillion in additional debt this year (after issuing a record $2.59-trillion last year) – we have learned that private companies are paying a lower rate of interest on their borrowings than the federal government of the United States.  These companies include firms like Berkshire Hathaway (Warren Buffett’s corporation), Johnson & Johnson, Lowe’s, Abbott Laboratories and the Royal Bank of Canada.  These are all well run enterprises – but they don’t have the assets or reach of the US Government.  Yet investors are will to accept lower interest rates from these firms than they are from the government.

Simply put, the market views the federal government as being a riskier credit than private firms.

So are we in trouble?  When the debt of a home improvement store is viewed by professional investors as less risky than a US T-bill, I’d say the answer is an unequivocal yes.

New Risk Standard: Spread to Buffett

There is one silver lining in all of this.  Professors and publishers of economics textbooks could be big winners.  They’re going to have to re-issue their texts  (which cost students as much as $250 per copy for 300-400 pages of generally misinformed nonsense) when they realize the risk free yield curve is no longer determined by government notes and instead by Berkshire Hathaway.   Perhaps from now on we can talk about how new debt issues are priced as a “Spread to Buffett”?

Congrats, Mr. B, on your ascension to primacy in the US bond market.  And Mr. Hamilton, wherever you may be, please accept our apologies.  It was great while it lasted.

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2 Responses to “ Are We Broke?: DC Alchemists Change US Debt from Gold into Tin (Part 2 of a Series) ”

  1. Bill Reeves on March 27, 2010 at 3:23 pm

    You know I always assumed that the Dems were like us just naive and poorly schooled. Now I realize their objectives are not those that traditionally have animated Americans.

    Pride is the greatest of sins. Pridefulness in the exercise of power over others is pride on cocaine. This is the besetting sin of our left elite.

    No wonder they’ve abandoned the True Faith. God hates Pride and that’s all they’re made of.

  2. John on March 27, 2010 at 10:27 pm

    These Dems bear little resemblance to those of Scoop Jackson and Jack Kennedy – men who understood that a healthy capitalist engine funded their desire to aid the average joe.

    The new bunch (and their useful idiot followers) think their role is to level the nation due to the fundamental unfairness of a capitalist system, and believe they can replace private wealth engine with a public wealth creation unengine. This utopian dream of their youth is what they are trying to put into place with mad taxes, redistributionist health care, massive debts that will lead to the sublimation of the dollar to an international body, the elimination of american borders and the expansion of the franchise to felons and ex-cons.

    Unfortunately for the rest of us, this new utopia’s air is heavy with the scent of sulfur and its warm soils are tough on rubber-souled shoes.

    They must go – and soon – or we’d better get used to brimstone-powered cars.

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