Baltimore, Maryland — The mellow stock market decline through mid-2008 (measured by historical yardsticks) and the bull market in U.S. Treasuries of all maturities belied not a crisis but some dreadful disease that had been effectively quarantined.
Perhaps as in history’s great epidemics, the doctors in this case had not seen this sort of sickness before and had yet to understand completely what strain of bug was at work. Although having DNA similar to pathogens seen in wartime debt buildups, this season’s strain encoded itself with the pattern of socialism: entitlements, bloated and intrusive government, and punitive taxation exclusively directed at the top brackets. Its vector of transmission is fiat currency.
Our culture leaves the body politic and the investment community with no antibodies to recognize this threat. In earlier eras such as the 1980s, the bond vigilantes watched the money supply and government outlays closely. At the turn of the century, leading bankers looked over their shoulder for signs of the next wave of panic from others who might have lent speculatively, and they kept their balance sheets in good shape for that rainy day.
Today, those who took defensive action through short selling or exchanging their money for commodities were instead pilloried in public hearings and damned for being speculators.
Even before the stock market panic that began in 2008, lenders were willing to accept historically low returns on short- and long-dated treasuries even if these nominal returns were being eroded by a CPI-U that pierced through 5 percent from June through August, or worse, by that and taxation, too.
The low interest rates then may have anticipated the risks revealed once the stock market collapsed. More joined this wary camp to push nominal returns below zero once deflation became evident. It may be this contagion is a virus capable of fooling the body’s defenses, sort of an HIV look-alike, since with long-term Treasury rates in the low single digits and a public that is not alarmed (or even aware) of the dangers of $60 trillion of national obligations, a message is being sent to the government that it might have unlimited supplies of free money that it might spend.
Private debt of $40 trillion plus $60 trillion of public debt and entitlements might have been enough moisture to feed a hurricane. But it might just as well require more, due to the behavioral aspects of the system and its complexity, so no economist might know what the breaking point may be.
Unfortunately, sometimes markets, like ocean skies, can be clear before bed but stormy in the morning. The storm that could break hardest would be the downgrading of the credit rating of the United States. For if we expect to pay off the obligations of the government through concentrating tax increases on the top brackets, foisting debts of somewhere between $500,000 and $2 million upon each rich household (depending on where the cut-point is drawn), no longer would the Treasury have the resources to honor its obligations.
Yes, complete dismantling of the socialist entitlement state would fix the problem. But the political will to do something this drastic could never come out of thin air; it would only come once we as a society as a whole hit rock bottom.
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