Monday, March 22, 2010

Is the U.S. Slowly Going Bankrupt?

At bloomberg today:

The bond market is saying that it’s safer to lend to Warren Buffett than Barack Obama.

Two-year notes sold by the billionaire’s Berkshire Hathaway Inc. in February yield 3.5 basis points less than Treasuries of similar maturity, according to data compiled by Bloomberg. Procter & Gamble Co., Johnson & Johnson and Lowe’s Cos. debt also traded at lower yields in recent weeks, a situation former Lehman Brothers Holdings Inc. chief fixed-income strategist Jack Malvey calls an “exceedingly rare” event in the history of the bond market.

If you know anything about financial mathematics, this really screw things up.  Many calculations are based on the underlying premise that the risk free rate is the U.S. Treasury rate.  By definition corporate bond rates are higher than Treasuries.

What is actually happening is that people no longer believe that the default risk for U.S. bonds is zero.  We are seen by the market increasingly as a credit risk.

If/when the "Obamacare" Health Bill becomes law, tack on another $500B in deficits over the next ten years.  The Medicare cuts alleged in the bill are politically unfeasible and will never happen.  One more heap of straw on the camel's back.

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