Market response to the downgrade of the Treasury was muted, perhaps the result of the initial downgrade occurred over 10 years ago, and Moody’s was only catching up with the other two major rating agencies.
The downgrade however is a stark reminder of the fiscal issues of the country. Many market luminaries including Waren Buffet, Jamie Dimon, Howard Marks, FRB Chairs Powell, Bernanke and Greenspan all have commented that the current path is unsustainable.
It is not a revenue issue but rather a spending issue. Unfortunately, it is political suicide to talk about reducing spending and many believe it will take a crisis to seriously address the issue.
If the current path continues, it is almost assured a fiscal crisis will occur. The question is when. Six months? Six years?
Recent data from the IRS states that in 2022 the top 1% paid 40.4% of income tax revenue on 22.4% of reported earnings. The bottom 50% paid less than 3% of income tax revenue and was about 11.5% of reported earnings.
The President has floated raising the top marginal rate to 39.6% from 37% for filers making more than $2.5 million. The IRS states that it would affect about 175,000 filers and have no meaningful impact on the deficit and inferred it would be detrimental given it is this cohort of filers that take risks by starting new job creating ventures.
Former progressive mayor of NYC, Bill DeBlasio commented that by raising taxes on a product that will ensure less consumption of that product, his argument for the NYC cigarette excise tax.
Does this not pertain to federal tax dollars?
An example of the possible prolific spending was highlighted in an article several weeks ago in the WSJ. The Journal wrote about the abuse of food stamps, an abuse largely of the result of state policies.
The WSJ wrote that a record of more than 41 million Americans are on food stamps and the “program long ago ceased to be temporary help for those in need.”
Enrollment does not shrink in a strong economy as it should and as the program was designed. It is believed it is contributing to one of the country’s most pressing social ailments: Prime age men attenuated from work and its attendant disciplines and contributions to society.
The program on paper requires able bodied adults without dependents work part time or lose benefits after three months. Government data estimates that a mere 16% of these adults work 20 hours a week or more and that only 28% of such adults have earned income.
The Journal states this is in part from states exploiting waivers from the federal government to dilute the work requirements.
Government data estimates that nearly 40% of these able-bodied adults without dependents live in areas where the work requirement is waived.
The Journal writes Congress can crack down on the waiver offenses and make work a centerpiece of the program in the tradition of Bill Clinton’s welfare policy reforms of the early 1990s. The 20-hour work requirement also ought to apply to those who have children old enough to attend school the Journal suggests.
It is often written that “truth is the first virtue lost in war and politics.” Key the outrage of suggesting such a policy.
Many believe the bond vigilantes are starting to rear their heads, demanding higher interest rates to fund the government’s prolific spending.
President Clinton’s infamous strategist James Carville once commented
I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a . 400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.
Are we almost there today?
Last night the foreign markets were up. London was up 0.63%, Paris up 0.51% and Frankfurt up 0.52%. China was up 0.38%, Japan up 0.08% and Hang Seng up 1.49%.
Futures are nominally weaker. Home Depot sales came in shy of expectations and the company stated it will not raise prices because of tariffs.
The 10-year is off 2/32 to yield 4.45%. Japanese notes tumbled after an auction received the lowest demand since 2012, pointing to concerns abut investor support as the Bank of Japan dials back its huge debt holdings.
KKR warned today that many are considering moving assets out of the US and diversifying as the traditional role of US government bonds is becoming more diminished due to the US large fiscal deficit and high leverage and inability of Washington to attack the problem.
