Posted by
Andy Zarowny on Sunday, June 07, 2009 9:54:28 PM
The Obama-Democrat Con-
gress spending spree of the
past few months may have
hit a brick wall. Federal
Reserve Chairman, Ben
Bernanke, testified before the
House Budget Committee on
last Thursday. He warned the
Congressmen that current
spending and borrowing levels
could not be sustained. He
intimated that spending cuts
and taxes increases needed
to be planned.
The issue Bernanke raised was
the ratio of National Debt to the
Gross Domestic Product (GDP)
which currently is at 41%. By
2011, should the current bud-
get plans continue, it will ex-
ceed 70% of the GDP. By
2019, it is projected to be at
82.4%. Without spending cuts,
taxes would have to be raised
60% across the board to have
any hope of preventing this.
Keep in mind that we are still
only talking about CURRENT
spending levels, already voted
on and approved by the Con-
gress. The expected new
health care program promoted
by Obama, who insists that it
be enacted upon before August
could add $1 Trillion dollars of
more to the already $1.8 Tril-
lion dollar budget deficit this
year.
The impact of the rising ratio
is a very simple one. We can
expect our AAA bond status
to be lowered to AA before the
end of the year. The British
are also facing a similar fate,
possibly within the next few
months. Such a reduction
would mean that the bonds
issued by the Treasury to fund
and service our National Debt
would be less secure. There
fore, less attractive to buy.
Already, the number of major
bond buyers has dropped from
over 50 nations and institutions
to 16. This coming week, more
bonds will be auctioned, and it
is anyone's guess as to how
this sale will go. Even if it is
successful, and the bonds are
purchased, the interest rates
will undoubtedly be much high-
er. This will 'trickle-down' and
effect interest rates on all com-
mercial and consumer borrow-
ing, further impacting any re-
covery out of the current rec-
cession.
China, one of the largest pur-
chasers of our debt-bonds,
has been very vocal for several
months, warning that they will
not be buying as much, if any
at all. They are already in dis-
cussions with other trading
partners, such as Brazil, to
switch from using U.S. dollars
to other currencies, such as the
Euro, anticipating higher infla-
tion rates on the dollar.
Bernanke made it clear on
Thursday that the Federal Re-
serve will not continue mone-
tizing the debt, as they have
been for the past few months.
He also warned that not only
will budget deficits of 12% of
the GDP, the percentage of
this year's level, can be sus-
tained, but even future levels
in the 4-5% range will be dif-
ficult to manage. Even the
reductions that Obama has
promised in the outlying
years of his administration,
will not be sufficient.
Bernake said this to the Con-
gressmen: "At some point,
you have to have a path of
spending and taxes that will
give you a stabilization of the
debt-to-DGP ratio. If you
don't, then fear that the debt
will continue to rise will make
it very difficult to finance it.
And at some point, you'll hit
a point where you'll have to
have both very draconian cuts
and very large tax increases,
which is not something we
want."
Most of the bonds being sold
now are short-term notes.
The average length of the
bonds servicing our debt is now
at around 4 years. Something
which has not happened since
World War 2. The confidence
required to encourage the sale
of long-term notes, such as
the 10-year, has ebbed. This
causes uncertainty and fear
in the markets. Coupled with
a reduction in the bond rating,
this spells bad news for get-
ting our financial house in order
and ending the current recces
-sion.