Hedgehog Party

Infinite Bond Market

There was a pop tune in the 1950s called "I'm Forever Blowing Bubbles."  I think they whistle this tune down at the Treasury.  Our leaders of financial governance are forever intervening in markets to accomplish this or that.  Inevitably, unintended bubbles form.  Bubbles are fun...even beautiful...but then they pop.  In our current environment, nobody is unaware of the recent demise of the real estate bubble.  But are we aware of the next bubble?

Our economy formed new private credit at a growing rate until 2000.  At that time we passed a point of peak private credit for the first time in over 70 years.  Until the private sector is purged of a lot of debt, real economic growth cannot continue.  The purge is happening in the private sector, but not in the public sector.

No politician or political group can pass up the opportunity to "save the economy and jobs."  Start the public money pump!  In the old Keynesian model, the public money pump worked pretty well.  Liquidity was about all the private sector needed to catch its breath and go on to the next economic peak.  After a major private credit peak, the private sector (and money pump) is frozen.  The public money pump is not designed to carry the whole load.  The Federal Reserve and the Treasury take on the role of the "Wizard of Oz"...just a loud noise from behind a curtain.  The Colossus is just an image and a fraud. 

When politicians (and citizens) demand that the booster pump become the main pump, all of sudden bizarre things happen...trillion dollar deficits as far as the eye can see; vast increases in the Federal Reserve balance sheet; corruption on a vast scale; social unrest; AND the potential for vast new bubbles.

What is the next bubble?  It is unlikely to be stocks or real estate...those recent bubbles are too firmly fixed in mind.  My bet is bonds.  Right now, there is an infinite market for bonds.  Here is how that works.  The Federal Reserve and Treasury supply liquidity, loans, and guarantees in abundance.  Banks receive this largese, but have no private market in which to lend it.   But there is an abundance of government bonds.  Borrow at zero percent, lend at 2-4% to a no risk borrower.  It sounds like a profitable banking deal to me. 

The wild cards are the value of the dollar and the rate of destruction of private sector debt.  That is what makes it interesting...you never know when the bubble will pop.

The Public Option is not Optional

Employer mandates have the effect of mandating the public option.  An analysis of the cost effect on small business leads to the inescapable conclusion that a vast number of employers will discontinue offering health insurance.

http://money.cnn.com/2009/10/08/news/economy/baucus_health_care.fortune/index.htm?postversion=2009100915

The secondary effects are mind-numbing.  Private insurance will collapse quickly, because public insurance is underfunded and does not bear its full cost.  Private insurance will provide a smaller pool for the cost shifting that politicians love. 

Physician reimbursements for public insurance are too low.   Heavier reliance on public reimbursements will force significant number of physicians out of business or they will choose to retire.  The long lines for medical care will begin almost immediately.

A sad day is near...all because of poor financial governance that allows financial ills to form and fester.

High Marginal Tax Rates

This post by the Tax Prof summarizes the effect on marginal tax rates of the proposed health care legislation.  Marginal tax rates as high as 80% are creeping into the middle income tax brackets.  It appears that some version of the health care bills will become reality, and it underlines the damage that a fragmented tax system can cause.  http://taxprof.typepad.com/taxprof_blog/2009/10/80-marginal-.html

Except for reducing "waste and fraud" there is little in the legislation that reduces cost, and a lot that selectively raises taxes.  Few are asking "If you can actually reduce waste and fraud, why aren't you doing it now?" 

The single rate income tax proposed in the Hedge Tax would directly affect 85% of the taxpayers.  The increase would be directly visible, and all of us could decide whether we wanted to increase it to pay for this program.