The Bonds That Can Cure America's Ills
Every once in a while, there is a way to resolve a host of problems that is so obvious it gets overlooked.
With that in mind, and in light of yesterday’s Federal Open Market Committee meeting and the reaction that followed, let’s have a look at four big problems: crumbling U.S. infrastructure; federal budget deficits; normalizing U.S. monetary policy; and the shortage of investment-grade debt.
Earlier this week, I discussed "The Worldwide Deficit of High-Quality Debt," so let’s focus on the other three.
1) Crumbling U.S. infrastructure
This is beyond debate: The U.S.’s potholed roads, crumbling bridges and tunnels haven't been properly maintained, and many are in service far beyond their expected lifespans. Our air-traffic control system is antiquated, and our airports, to quote Vice President Joe Biden, make us look like “some third world country.”
It is no surprise when we see how little the U.S. spends on infrastructure compared with other industrialized nations. Not making needed long-term repairs and improvements while financing costs are so cheap is simply indefensible.
2) Federal deficits
Speaking of indefensible: The federal debt now stands at more than $18 trillion dollars, and counting. Much of this debt is at interest rates that are higher than today's rates.
Any rational, intelligent and prudent person would of course take advantage of prevailing ultralow rates to refinance this financial obligation. It's fiscally conservative, it will save trillions of dollars, and it will allow the U.S. deficit to get paid down that much faster.
The main obstacle is the U.S. Congress, a collection of preening peacocks who really don’t care about the deficit.
How do we know this? Have a quick look at their past votes. Look at how they voted for unfunded tax cuts in 2001 and 2003. Tally their votes for an expensive war of choice in Iraq. Look at how they cast their votes for unfunded entitlements such as Medicare Part D. These votes reveal that most of the people currently complaining about the deficit have no interest in reducing it. They are merely using the deficit as a tool to pursue their partisan ideology.
Whenever I hear a representative or senator indict deficit spending, the first thing I do is check their voting record. Here is one place to start:
You can do this with any issue -- from Barack Obama's stimulus plan in 2009 to George W. Bush's Medicare Part D. What you will find is that the vast majority of these folks are hypocrites. They are partisan hacks from both parties who support deficit spending when their party controls the White House and vote against deficit spending when they are out of power.
Placing political party over country is standard operating procedure; it is unacceptable.
3) Normalizing U.S. monetary policy.
Yesterday, the FOMC removed the word “patient” from its policy statement. But it added a line: “This change in the forward guidance does not indicate that the Committee has decided on the timing of the initial increase in the target range.” The market interpreted that as a more dovish stance than whatever was meant by “patient.” Stocks took off and bonds rallied, driving the 10-year yield below 2 percent.
As we noted before, there is a worldwide lack of high-quality, long-term investment-grade securities. This shortage is why bond-experts such as Jeff Gundlach expect interest rates to remain low for an extended period of time. Increasing the amount of debt issued by the U.S. Treasury would go a long way toward helping the Federal Reserve normalize monetary policy.
There is a widespread belief that the Fed can achieve the same result by simply selling the $4.18 trillion of fixed-income securities on its balance sheet. But that would be potentially disruptive, possibly causing an economy-crushing spike in rates. The more prudent approach is to simply let those holdings -- with an average duration of about seven-years -- run off as they mature. That would be the least disruptive method for the Fed to unwind the bond purchases stemming from its program of quantitative easing.
Hence, we see that a variety of serious issues can be resolved by simply refinancing the country’s debt, issuing more paper and maintaining and rebuilding the U.S. infrastructure.
All we need is for a partisan, incompetent, do-nothing Congress full of political hacks on both sides of the aisle to step up and do the right thing. How hard can that be?
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