Tug of War in the Bond Market
There’s an extreme tug of war taking place in the bond market: It is between the deficit doves and the deficit hawks.
You cannot be a bond investor today without letting politics creep into your decision-making psyche. Whether you are for continued spending or increased austerity, whether you vote for liberal candidates or more conservative ones, realize that Congress will not decide who wins this tug of war. The bond market will make the ultimate decision. The bond market will be the judge and jury, hangman and executioner, all rolled into one giant arbiter.
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As the Greek debt crisis went into full swing during May 2010, many television talking heads downplayed the suggestion that the United States is like Greece. After all, our economy is considerably larger and produces a much bigger variety of goods. Our real similarity with Greece, however, lies in our entitlements and in our continued practice of spending with abandon.
At the current spending rate, by 2030 United States public debt as a percentage of gross domestic product Figure 1, which is taken from the Congressional Budget Office’s Long-Term Budget Outlook, shows that the outlook is not pretty.will be 146%.
You may be asking yourself, why and how has debt risen so much? Public debt is now double what it was over the past three decades. The largest of several 800-pound gorillas driving this debt is entitlement spending.
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