Appetite for our debt is waning.

The small stock market rally was stopped cold today due to a upward movement in the sale of five year notes. For those that have been warning us about these days, this article is the beginning of the proof points on deficit spending. The market saw this news and dropped almost 250 points from 1:00pm until 3:00pm.

Here are the basics as I understand them. The increase in the interest rate on the 5-year notes sold by the US means that we had to raise the rate of return to attract buyers to our debt. Nested in this article is the fact that the UK has had issues that did not even sell out. So we raised the rate and sold the notes, why did the market react to this? Having to increase the rates means that there are less buyers for our debt. The rates can continue to climb to attract buyers but that interest expands the cost of all of the deficit spending programs. Should we hit the point as the UK has that sometimes there just are not enough buyers, what then?

Then we have three options.

Don’t spend (ha ha ha ha … sorry that was President Obama butting in) as much money. Which would limit the government’s ability to fulfill all of the promises to the banks and in the stimulus package. Many will say this is good, but for those dependant on every word and action from Washington this is not good news.

So another option is to tax and tax heavily to get the money from the US economy instead of elsewhere. This is not good and will likely lengthen and deepen the recession. This would counter all of the good news this week that the economy may be stabilizing.

Or we can simply print money that does not exist and pretend. But that devalues all of the outstanding notes and is likely to make the current problem worse, causing us to raise the rates anyway to attract buyers.

So this action in the 5-years notes is bad news… very bad news. The end of our deficit spending may be at hand or at least far more limited. And we have not even approached the 2009 budget and the 10Trillion in debt it demands.

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