Last week, the Treasury Department announced that America’s budget deficit for the fiscal year ending September 30 will be roughly $500 billion, the smallest it’s been since 2008. This was hailed as good news in most quarters.
Considering that we’ve been running deficits closer to (or over) $1 trillion for the last five years, I suppose it is good news, relatively speaking. But I can’t buy into the optimism. For me, the fact that prominent people are praising our government for only spending $500 billion more than it is takes in is depressing–and scary. It’s a clear symptom of how warped our thinking on the issue has become.
Politicians from both parties claim to be concerned about our national debt, which now clocks in at close to $18 trillion (up from $10 trillion eight years ago). But neither side has shown any willingness to compromise their spending priorities to do anything about it. The left won’t touch out-of-control entitlements like Medicare and the right won’t cut our bloated defense system. The same depressing stalemate persists when it comes to raising revenues. The right won’t consider anything even remotely close to a tax increase and the left won’t consider cutting our absurdly high corporate tax rate, which would spur economic growth and keep more companies from relocating.
Many economists have warned that this intransigence will inevitably force interest rates higher on government bonds. But that hasn’t happened. Not yet anyway. Instead, rates have continued their 25-year decline. Ten year Treasuries now have a 2.5 percent yield, down from 3 percent at the beginning of the year. These trends caused liberal economist Paul Krugman to crow that “the debt apocalypse has been called off.” Krugman has repeatedly written that he believes our national debt is too low, and that we should have spent more to stimulate the economy after the 2008 financial crisis. I do not agree with his reasoning.
By running huge deficits and piling trillions more onto our already massive debt, we’re acting like a blindfolded knife thrower. With every blade we fling, we get closer and closer to disaster. Just because we haven’t impaled the person standing against the wall yet doesn’t mean the next piece of cutlery we throw isn’t going to be the one that catches an arm or leg, or maybe even an internal organ.
I’ve seen this sort of thing time and time again in my career. The good times keep rolling until they stop–and when they stop, they stop fast. Given our economic fundamentals, there is no way I would recommend buying U.S. bonds. The whole point of buying bonds instead of stocks is to protect capital. And when interest rates inevitably rise again, that will be impossible.