Corporate & Securities Law

The Market Responds

The final vote hasn’t even been taken to “fix” the omnibus (or ominous) health care “reform” legislation that President Obama signed into law this week, and already the first volley of the market’s response has been sounded.  Today’s Wall Street Journal Online reports that “Prices of most Treasury notes and bonds were lower after relatively tepid demand … sending the 10-year note’s yield to its highest level since June.”

Seems the prospect of a $1 trillion dollar health care program and the debt it will require (despite the fabled “analysis” by the GAO), is already beginning to weigh on the suppliers of investment capital.  The WSJ piece goes on to quote James Caron of Morgan Stanley as saying, “The weightiness of supply [of treasuries] finally broke the camel’s back.”

No, I am not surprised. Nor should be anyone who has kept a clear view of the federal government’s spendthrift policies, exacerbated since the beginning of the Obama era. The only surprise may be at how quickly the market has reacted to the flood of federal debt offerings that have been stacked up on the horizon.

What’s in this for you, dear consumer? Higher interest rates and reduced access to credit. Now that isn’t necessarily a bad thing. Most Americans could use a diet from their leveraged spending habits. However, reduced credit does mean reduced consumption–i.e., lower economic growth. And it does mean that some productive investment is less likely to happen as higher interest rates reduce the present value of investments. This, dear consumer, is what is meant by “crowding out.”

The first volley is fired. There is only so much General Bernanke can do to protect the ramparts. Barring significant reductions in federal spending, look for continued “tepid demand” and commensurately higher interest rates over the next several months. Even if you aren’t one of those being directly taxed to support the new health care “law of the land,” you will be paying for it one way or another.

Full post as published by Truth on the Market on March 25, 2010 (boomark / email).