Wednesday, April 7, 2010 as of 11:14 AM ET
Published January 05, 2011
| FOXBusiness
We've got an auto czar, a weatherization czar, even an Asian carp czar.
But where is the deficit czar?
Isn't the deficit a clear and present danger, the most threatening of all, one that could really sock it to our wallets?
It is remarkably foolish for anyone to play down the bond market's reaction to the ballooning deficit and out of control government spending. Historically that reaction has been sudden, violent and severe.
The nay sayers either forget or are ignorant of history, including how the bond markets' negative reaction accelerated economic crises that gripped various countries since the "?80s, as in the Latin American and Asian debt crises.
President Barack Obama is expected to detail his plans for revamping the nation's finances in his State of the Union address this January, after the Democrats added $3.8 trillion to the deficit in just two years. That $3.8 trillion figure doesn't count the budget-busting cost of health reform, a bill that passed on tenuous grounds and shaky math after Congress railroaded it through to enactment via a parliamentary maneuver called budget reconciliation. Reform justified as cutting the deficit via maneuvers that counted 10 years of revenue but only six years of spending.
It is borderline silly for White House officials to claim catastrophic consequences if the Congress does not raise the government's debt ceiling beyond the present $14.3 trillion, and to warn that a failure to do so means the nation tips into technical credit default.
And that's not just because the Congress has raised the debt ceiling 11 times since 1996"”and, no surprise, for 14 consecutive years the Government Accountability Office says it could not sign off on the government's books because they are in such disarray because of shoddy accounting moves like the one used in health reform.
Top analysts at credit ratings agencies Standard & Poor's and Moody's Investors Service say what could push the U.S. into losing its Triple-A rating are rocketing interest costs on the debt that are now eating up more and more of federal revenue.
The ratings agencies do not want any sovereign government getting on the hamster wheel of either printing money or borrowing money to pay interest on fiscal debt.
And sources at these companies are stunned by the speed of government borrowing, so much so they say that consideration of a downgrade to the U.S.'s Triple-A rating is no longer an event for the decade beginning in 2020, but may come as soon as 2015.
Interest costs to service the US debt as a percentage of federal revenue is the key ratio that the ratings agencies look at closely.
What should concern you is that means Congress would be more inclined to raise taxes to preserve the denominator of that equation and the Triple-A rating, ka-chinging open once again America's cash register, the US taxpayer.
The nation's debt is now about equal to the size of the US economy, at $14 trillion. Gross interest cost on the US debt is now $413.9 billion. That's more than the size of the economy of Belgium. That $413.9 billion figure includes interest on intra-government holdings in Social Security. Strip out those costs, and net interest on the U.S. debt is $197 billion or 9% of the $2.1 trillion in federal revenue.
The ratings agencies look at both, but seem to weigh net interest costs more, the $197 billion figure. Some insiders tell me if interest on the U.S. debt surpasses 15% of federal tax revenue, then that will set off alarm bells. Factor in Social Security, it's already approaching 20%.
Again, it is remarkably foolish for anyone to dismiss the bond market's reaction to government debt issuances here and overseas. Also, rising US rates exacerbated the Latin American debt crisis of the early "?80s and "?90s as well the Asian crisis of '97.
And the bond market's reaction to increased spending under Clinton Administration was swift and brutal. When the budget deficit increased under the Clinton Administration in the "?90s, the bond market sold off rapidly. Bond yields about doubled in several years' time to more than 8%.
The White House was forced to back off and instead balance the budget. That prompted James Carville, then an advisor to President Bill Clinton, to say: "I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody."
Worldwide, trillions of dollars in bonds are clamoring for a finite pool of investors, as governments around the world struggle with moving their economies out of their own recessions.
A bond market car pile-up can only mean yields spike higher"”which can happen, too, if a drop in confidence sparks a contagion of fear in countries who are buyers of US debt, including China, the UK and Japan, already publicly squeamish at the US Congress's fiscal recklessness.
Federal budget deficits and rising government debt for now are not yet weighing on the bond market. Yields are holding steady in the U.S. bond market for now, and action seems to be tightly geared to the Eurozone, where investors flee to the safety of US Treasuries. For now the bond vigilantes are beating up on Greece, Portugal, Italy, and Spain before they are coming to the U.S..
Still, no government should want the bond vigilantes enacting fiscal discipline for it. The bond markets' takedown can be sudden, brutal, and violent, which is why governments must enact fiscal discipline themselves.
Some bond market watchers fear that by year-end the yield on the 10-year U.S. Treasury could hit 5% as foreign investors become more demanding on the U.S.
Dozens of czars now populate the U.S. government.
So where's the deficit czar?
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