Abu Wabu

For a while now, I've been asking people at conferences, on and off the record, what America's sovereign debt risk is? That is, how long until people stop treating treasuries as the "risk free" securities, and start demanding a premium for the risk that we might default.

The answer from the right has been a nervous (perhaps hopeful) 2-3 years. The answer from the left, and professional Democratic wonks, is some unspecified time in the future. Probably, there will be a Republican in charge. Markets hate Republicans.

But last Thursday, the Treasury auction was . . . well, descriptions vary from "weak" to "horrible". This raises the unpleasant possibility that markets are, as my business school professors insisted, "forward looking". Voters may believe that getting a bunch of special interests to agree in principal that costs should be cut is the same thing as actually cutting costs. Bond markets don't.

I had thought that Obama's speech where he reluctantly and sadly tells the middle class he might have to kinda break his campaign pledge and raise their taxes -- which will surely be hailed as "The Greatest Speech on Increasing Income and Payroll Taxes Since Lincoln's Gettysburg Budget Reconciliation Speech" -- would be put off, coincidentally enough, to just after Obama's second inauguration. But now, with his ability to borrow until that point now threatened, he may have to make it sooner.

Which of course raises the Big Question which no one in the media will ask him. He will explain, sadly, that Bush's recession and "runaway deficits" were/are much worse than he thought, and therefore he cannot both honor his promises to spend like the wind and his promise not to increase taxes on the middle class. (Actually the middle and upper middle class and lower upper class too, as he promised that no one making under $250,000 per year would see an additional "dime" in taxes.) And therefore, with greatest reluctance, you understand, he'll have to raise taxes.

And he'll say he has a mandate for that, because that's what the people voted for.

But they didn't.

As the boss recalls this morning, George Bush tried in 2005 to warn about the
looming crisis in entitlements. What kind of response did that get? Democrats like Harry Reid accused Bush of fearmongering and panic, and assured Americans that “the so-called Social Security crisis exists in only one place — the minds of Republicans. In reality, the program is on solid ground for decades to come.”

Obviously not. Last month, I noted several more of those Democratic demurrals in 2005, along with the news that Social Security surpluses have already disappeared. As I wrote earlier, Treasury’s website shows that we lost money in February for the first time ever — and that will only get worse as the economy slows, unemployment rises, and more people start drawing Social Security.

# posted by Yr. Fthfl. Svnt. @ 3:22 PM