Sunday, May 10, 2009

Deficits Matter

The consequences of the Obama budget deficits are already becoming obvious. Liberals who once decried Bush deficits of $300-400 billion are now mostly silent when Obama's are in the trillions, but the bond market will bring all of us down to reality. All the money Obama wants to borrow comes in the form of Treasury Notes which must be put up for auction. The government sells them to bidders and the interest rate on them reflects supply and demand plus the outlook in the future. So, if you are trying to sell a 30 year bond, the buyer will want to set the price at a level which will allow him to make money over that length of time. If the supply is large, the price will be lowered and the interest due on the note will be higher. There was an auction last week and the interest demanded by the buyers of the 30 year notes went from 4.1 to 4.3%. This may not seem like much,but we have only begun to sell these things to finance Obama's budget excesses. When the interest rate on treasury notes goes up, the interest rate on everything goes up. We are in the very early stages of what could be Jimmy Carter squared.

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