From Peter Tchir, TF Market Advisors
Bernanke Does More For The Budget In 15 Minutes Than The Government Does In A Year
Now that we are being inundated by reports telling us how the government has saved us and reached an historic $38 billion of cuts, it's time to put the result in perspective. This was 'Winning' only in a way that Charlie Sheen could understand. The government would have shut down if a solution wasn't reached. It's not like this was done randomly - the laws of the country forced them. It took the threat of government shut down (which some people seem to think is a bad thing) to force them to come up with $38 billion of cuts. Even with looming shutdown, they couldn't help themselves from throwing in some riders. Although, even the riders were less odious than the President trying to convince us earlier in the week that not allowing planned budget increases actually counted as budget cuts! They really did try and tell us that by not going implementing planned spending increases, they were actually saving money. Say what? Maybe that logic applies to Saks' shoe sales, but in the real world, that is not a cut, nor is it savings.
Anyways, it seems pretty clear that in spite of potential government shutdown, threat of public backlash, our government could barely get its act together to cut $38 billion. Yet with $14.3 trillion of debt outstanding, an increase of 0.25% would add $36 billion to our deficit! Mr. Bernanke, who claimed on 60 minutes, that he can squash inflation within 15 minutes has relatively few policy tools to do that. Pretty much only raising rates or stopping QE2. Raising rates is the simplest, but if a 0.25% rate increase (minimum the Fed has ever done) adds $36 billion to the deficit, will he, or anyone else have the stomach to deal with the consequences?
Just think how hard it was for the government to reach an agreement on $38 billion. That agreement was only reached to avoid the imminent shutdown that both parties decided they would face negative consequences from the voters for.
Should one man have this much power? It wasn't as much of an issue in the past, but as our debt has grown out of control, it's a real issue now. You can argue that with a steep curve maybe you wouldn't get a 0.25% cost increase across the board if the fed raised short term rates. You can argue that at least a trillion is held by the Fed so it's a wash (but then why does it count in the debt limit in the first place). On the other hand, you could argue that we should have the same rate as the ECB since allegedly our economy is in better shape than Europe. That would be a 1% increase. If you believe that QE2 has held down borrowing costs out the curve, than merely stopping that could add to our cost.
We are at historically low rates, yet the bulk of our debt remains funded relatively short term. So far I haven't seen a single budget proposal that shows a significant decrease in debt outstanding over the next 10 years. Shouldn't we borrow out to maturities that reasonably reflect when we can pay back the debt? By funding so much 5 years and in, we save a meaningful amount of current interest expense, but expose ourselves to rate shocks in the future. ARM's killed homeowners who weren't prepared. Too much short term debt helped kill Greece and is killing Portugal. Yes they have spending problems, but had they locked in low rates for a long time they wouldn't face the same degree of current pressure. If we know we won't be repaying debt for 10 years, we should borrow more out to 10 years. The cost would be shocking. Maybe even prohibitive. But that is what we need! That cost is real. Maybe if we funded all to 10 years, government would become horrified at the cost and really start to cut the budget. At least Ben isn't responsible for this fiasco. That is Treasury. On $10 trillion of marketable treasuries, the average rate is 2.5%. If we pushed that funding towards 10 years, it would jump 1%. Even at 2.5% average cost, it is much less then the 4.6% average cost we had just 5 years ago. That would be a 2% or $280 billion shock to the system!
So, at a time where the government has demonstrated a complete lack of will over $38 billion, we are left in the hands of Ben to determine short term rates, influence the curve, and Timmy to determine what maturity profile that 'best meets our needs'. The actions of either of these two unelected individuals could dwarf the $38 billion as every 1% of increased borrowing costs would cost $143 billion. Since the government could barely deal with $38 billion, how will they deal with increased borrowing costs? Does even congress know just how trivial their cuts look relative to the potential increases in debt cost?