Listening to some of the comments coming out of Washington, you have to wonder about what we are hearing. “The economy is getting better.” “We are trying to avoid a double dip recession.” And then there is the “Fiscal Cliff,” and Congress can’t come to a compromise to solve it. And then everyone packs up and goes home for Christmas.
Obama wants to tax the rich, no big deal, it isn’t going to raise the revenues we need and the amount won’t even cover the interest payment on the national debt. The big sticking point is that Obama wants the ability to raise the national debt limit without having to run it by Congress. I don’t think Congress will grant him that wish.
The economy seems to be picking up steam; most of it is tied to consumption. The main reason for this appears to be the low interest rates. Why save it? With the miracle of compound interest, it only takes about 144 years to double your dollar deposited today. The really laughable thing is the spread between high risk bonds and Treasuries is about 3 percent.
Interest rates in the bond market can’t go much lower but they have the built in ability to go higher. Examine the two graphs below. Graph one shows the value of a 1000 dollar 30 year bond issued at 3 percent interest. Notice what happens to it as interest rates jump up. Whoever holds these 30 year bonds will take a bath (you will get your principle back--if you can wait 30 years).Just a doubling of interest rates would be a 42 percent loss. Of course if rates went to 15%, you might want to buy these bonds, it would be a once in a lifetime opportunity.
With high unemployment and a lot of seniors opting for early retirement, look for decreased tax revenues next year. That may be why there is no compromise over the fiscal cliff debate in Congress. We need the tax revenue, don't pass the tax cut, and the Republicans will be blamed for it. Of course the voter has a poor memory, the Bush tax cuts were a Republican thing, and come next election, the Democrats will get burned for not passing it.
Congress IMHO is a shambles. Everyone wants to talk and no one is listening. The key to the whole debate revolves around the national debt. Will the debt ceiling be raised? The Democrats can spend all they want, but if the debt ceiling isn’t raised, they’ll run out of money some time before inauguration.
The election was pretty well split even, half Republican and half Democrats. I would imagine that rich people populate both parties evenly. So the real issue seems to be where our tax money will be spent and can we keep spending at the current rate?
Christmas is coming next week, and it doesn’t look like Obama will get what he wanted from Santa. Putting coal in his stocking wouldn’t be politically correct. Congress is a little like Santa. We get something real from these Congressional elves that nobody had to pay for. --Inflation.
Merry Christmas everyone.
Copyright 2012 by Jim Brubaker