In Warren Buffett we trust

Daniel Kruger and Bryan Keogh at Bloomberg make an unsettling observation about the market for U.S. treasury notes today:

The bond market is saying that it’s safer to lend to Warren Buffett than Barack Obama.

Two-year notes sold by the billionaire’s Berkshire Hathaway Inc. in February yield 3.5 basis points less than Treasuries of similar maturity, according to data compiled by Bloomberg. Procter & Gamble Co., Johnson & Johnson and Lowe’s Cos. debt also traded at lower yields in recent weeks, a situation former Lehman Brothers Holdings Inc. chief fixed-income strategist Jack Malvey calls an “exceedingly rare” event in the history of the bond market.

The $2.59 trillion of Treasury Department sales since the start of 2009 have created a glut as the budget deficit swelled to a post-World War II-record 10 percent of the economy and raised concerns whether the U.S. deserves its AAA credit rating. The increased borrowing may also undermine the first-quarter rally in Treasuries as the economy improves.

“It’s a slap upside the head of the government,” said Mitchell Stapley, the chief fixed-income officer in Grand Rapids, Michigan, at Fifth Third Asset Management, which oversees $22 billion. “It could be the moment where hopefully you realize that risk is beginning to creep into your credit profile and the costs associated with that can be pretty scary.”

Kurt Brouwer at MarketWatch borrows a graphic from the Cato Institute to help us visualize the magnitude of the problem:

That’s quite a number — $2,590,000,000,000 — in Treasury sales over the past year or so. Why are we issuing so many Treasuries. Because we can and because we must due to huge government spending initiatives.

Take a look at this chart. This shows five decades of government spending by category. Only one category has been going up and that is the red line.

The combined unfunded liability of Medicare and Social Security has reached a staggering $107 trillion.  Our children and grandchildren face higher taxes, a growing national debt and deficits as far as the eye can see.  Serious proposals to address our nation's long term solvency are met with contempt from the mainstream media and fear-mongering from our elected officials.

If we do not correct our course and soon, the U.S. may really lose its AAA credit rating, and the phrase "full faith and credit of the United States Government" may be relegated to the dustbin of other historical discards, like "Give me liberty or give me death."

Obama budget will add $9.7 trillion to the national debt over next decade

It is mind-numbing what passes under the news radar these days on a Friday afternoon. From the Washington Post:

President Obama's proposed budget would add more than $9.7 trillion to the national debt over the next decade, congressional budget analysts said Friday. Proposed tax cuts for the middle class account for nearly a third of that shortfall.

The 10-year outlook released by the nonpartisan Congressional Budget Office is somewhat gloomier than White House projections, which found that Obama's budget request would produce deficits that would add about $8.5 trillion to the national debt by 2020.

The CBO and the White House are in relative agreement about the short-term budget picture, with both predicting a deficit of about $1.5 trillion this year -- a post-World War II record at 10.3 percent of the overall economy -- and $1.3 trillion in 2011. But the CBO is considerably less optimistic about future years, predicting that deficits would never fall below 4 percent of the economy under Obama's policies and would begin to grow rapidly after 2015.

Deficits of that magnitude would force the Treasury to continue borrowing at prodigious rates, sending the national debt soaring to 90 percent of the economy by 2020, the CBO said. Interest payments on the debt would also skyrocket by $800 billion over the same period.

Obama's tax-cutting agenda is by far the biggest contributor to those budget gaps, the CBO said. As part of his campaign pledge to protect families making less than $250,000 a year from new taxes, the president is proposing to prevent the alternative minimum tax from expanding to ensnare millions of additional taxpayers. He also wants to make permanent a series of tax cuts enacted during the Bush administration, which are scheduled to expire at the end of this year.

"Over the next 10 years, those policies would reduce revenues and boost outlays for refundable tax credits by a total of $3.0 trillion," wrote Douglas W. Elmendorf, the CBO director. Combined with interest payments on that shortfall, the tax cuts account for the entire increase in deficits that would result from Obama's proposals. (emphasis added)

Refundable tax credits is a politically correct way of saying income tax welfare for people who don't pay income taxes.  The net result will be a shrinking tax base.  Connie Madon at BloggingStocks explains:

According to estimates by the Tax Policy Center, nearly half of households -- 47%, or 71 million -- will pay no federal tax. Why is number so high? The answer lies in the myriad refundable tax breaks. And the number has risen since the enactment of the recent $787 billion stimulus package.

The great majority of households making under $30,000 fall into this category. Here is a breakdown by income:

Half of households making between $30,000 and $40,000 will pay no taxes.

Some 22% of those making $50,000 to $75,000 will pay no taxes.

And 9% of households with incomes between $75,000 and $100,000 will not pay taxes.

We must keep in mind that these numbers exclude weekly payroll deductions. When that number is factored in, only 24% of households will have a net tax liability of zero.

There will be a big brouhaha in Congress when the repeal of the Bush tax cuts come up for renewal. President Obama wants to increase taxes for those making over $200,000. He wants to extend the Bush tax cuts for everyone except high-income earners.

Underlying these numbers is a greater problem: the tax base is shrinking. That means less federal income, and therefore the need to find new sources of revenue.

A shrinking tax base in a sluggish economy with a growing entitlement class and a projected national debt of 90% of GDP by 2020.  What could possibly go wrong?

Thune's amendment to kill TARP falls short

Earlier this week, I told you about Senator John Thune's plan to kill the TARP program as a condition of raising the debt ceiling.  True to his word, he offered such an amendment on the floor of the Senate yesterday, but it failed to get the required 60 votes.  From Reuters:

The measure by Republican Senator John Thune sought to end the controversial $700 billion Troubled Asset Relief Program, created under the Bush administration to throw a lifeline to ailing Wall Street banks during the financial meltdown.



Thune's amendment drew 53 votes, short of the 60 needed for passage in the Democrat-controlled Senate. Thirteen Democrats supported the measure.


Many banks have paid back the bailout funds as Wall Street has recovered from the crisis.
Democrats hope to capitalize on widespread animosity toward Wall Street by using the remaining money for job creation.

The House of Representatives last month voted to use $75 billion of leftover TARP funds for road construction and other job-creating projects.

The Obama administration also wants to use the money to boost credit to small businesses, which have had trouble getting loans that would allow them to expand and hire new workers.

Thune and other Republican supporters said the money should be returned to the Treasury Department to avoid adding to the national debt, which reached a record $1.4 trillion last fiscal year.

"It's a very straightforward way that we can signal to the American people that we're serious about fiscal responsibility," Thune said. "We have gotten very far afield from what the purpose of the TARP program was in the first place."

You can view the roll call vote here.
While it appears that some Democrats got the message sent by the voters of Massachusetts on Tuesday, it is clear that most did not.  The Republicans have a real opportunity here to extract some meaningful,fiscally responsible concessions from the Democrats.  I hope they don't blow it.

Democrats move to raise debt limit by $1.9 trillion. Thune says: End TARP

Just a day after losing their supermajority in the Senate, Democrats called for a $1.9 trillion increase in the U.S. debt limit.  Why on earth would they do that, you ask?  It's very simple.  They want to raise the debt ceiling enough to fund the obligations of the U.S. treasury up to and beyond the mid-term elections in November.  They think you will forgive and forget.  Politico reports:

Upping the ante just a day after losing their 60th Senate seat, Democrats moved Wednesday to seek a $1.9 trillion increase in the federal debt ceiling and give the Treasury adequate borrowing authority past November’s elections and into next year.

Republicans were caught off guard by the scale of the increase which follows a $290 billion short-term debt increase approved prior to Christmas. “That’s just escapism of the worst sort,” Sen. Judd Gregg (R.,N.H.) told POLITICO. But Democrats countered that their only alternative would be to give-in to a Republican strategy of forcing multiple smaller debt ceiling increases, designed to bleed them politically before November.


This perception was reinforced by a meeting Tuesday between Treasury Secretary Timothy Geithner and Senate Republican Leader Mitch McConnell (R-Ky.). By going now with the higher $1.9 trillion target, Democrats are making a high-stakes gamble that the party can pull together once more to put the debt ceiling issue behind them for this election year.

 In addition to losing the Senate seat in Massachusetts to Republican Scott Brown, it is not at all clear that all the Democrats are on board with the heavy lift.

Democrats will soon have just 59 votes, once the Massachusetts victor, Republican Scott Brown, takes his seat. The timing of that transition is not yet certain, but Baucus indicated that he now expects the debt fight will spill into next week.


Beyond this transition, the more immediate problem for the White House is pulling together about a dozen fiscal moderates, one of whom—Sen. Evan Bayh (D—Ind.)—voted against the much smaller $290 billion increase in December.


The lead player remains Senate Budget Committee Chairman Kent Conrad (D-S.D.) who has participated in on-going White House talks but said Wednesday evening that he still lacked the assurances needed to back such a larger long term debt increase.

The Republicans are in a unique position to effect some real change here.  Senator John Thune (R-SD) has an idea that may help the Democrats secure the needed votes.  Kill TARP:

Sen. John Thune, R-S.D., introduced an amendment to the House-passed debt ceiling increase currently before the Senate that would end the Troubled Asset Relief Program. Thune's amendment would prohibit the Treasury Department from making any further commitments of TARP funds and would mandate that all returned funds be used to lower the national debt.



"The Senate will be voting to raise statutory debt limit to a staggering $14 trillion, making this an ideal time to practice real spending restraint by ending TARP," Thune said in a news release.


On Christmas Eve, the Senate voted 60-39 to increase the debt ceiling by $290 billion to $12.394 trillion. There is now a measure before the Senate that would raise the debt limit by another $1.9 trillion, this time to $14.294 trillion.


Recently, the Congressional Oversight Panel for TARP released their January Oversight Report, and the panel noted that although TARP authority ends Oct. 3, any funds committed by that date but not yet spent can still be spent under TARP past the deadline.

That's a premium idea, Senator Thune.  And a good start.  I'll wager that Scott Johnson will like it, too.