Our ideas are getting attention. I got word earlier this week that a popular newspaper in Ohio recently ran an op-ed piece about our “broken bowl” theory.
I’m flattered... I think.
Their conclusion was just what we hoped - a solid jab at Uncle Sam.
“Wouldn’t it be grand if the government subscribed to the broken bowl theory?” they asked. “The more we give the government in tax revenues, the more it spends. That’s because its bowl never stops getting bigger... as it gets bigger, your government spends even more. It’s the culture of politics.”
Ahhh, dear newspaper editor, it’s not just taxes. We learned to beat that system a long time ago.
A loophole-rich tax code won’t feed Washington’s spending addiction. There’s no army of politicians on the planet willing (or able) to plug those gaps.
Instead, our nation’s leaders have embarked on something much more sinister... something they hoped you’d never figure out.
Most folks have no idea, but Washington was able to lock in a good chunk of its latest short-term debt with a record-breaking interest rate of - brace yourself - zero percent.
Uncle Sam fed his addiction for free.
Worse yet... those same three-month T-bills briefly traded in the secondary market with a negative interest rate. Folks that bought these ultra-safe bonds are virtually guaranteed to lose money.
The problem isn’t likely to go away any time soon. After all, the latest Fed “dot plot” shows that the idea of negative interest rates was bandied about - for the first time ever - at the latest meeting of the nation’s monetary minds.
I can’t overemphasize how monumental of an idea that is.
It means everything stands to go backwards.
The idea of free money is great news for a country with $18 trillion in debt... but more than a tad worrisome for the economy it backs. This “death of interest rates” threatens to flip traditional rules of investing on their head.
It threatens to fuel Washington’s addiction to spending money it doesn’t have and, worse, it eradicates traditional savings mechanisms. With negative rates, you get charged to save. Give uncle same a buck... he’ll give you $0.95.
Not exactly a get-rich-quick scheme... and it certainly won’t help you bust out of those shackles known as mediocrity.
But jaded rhetoric won’t get us anywhere. To avoid this trap, we need to know where it’s hidden. We need to understand what’s happening.
There are a lot of long-term variables that led to this mess. But one very short-term situation pushed rates to zero this week.
It’s that damned debt ceiling.
Like all things, bonds trade based on supply and demand. This week, with the very real threat of government shutdown in just two months, cash-rich investors are looking for somewhere to park their money.
Remember, large institutions, hedge funds and corporations can’t just pull up to their local bank branch and deposit millions of dollars. They need highly liquid, highly safe assets to park their cash – like those from the Treasury.
With the Treasury’s supply threatening to run out on December 12, there’s a scramble for liquidity. These “depositors” want to find a safe short-term place for their money before a crisis looms. That’s why the $21 billion offering of three-month bills this week had $4.14 worth of bids for every dollar offered.
Supply was far lower than demand.
It’s a trend we’ll likely see accelerate as the debt ceiling debate heats up. The larger the threat of a shutdown, the lower interest rates - across the yield curve - will dip. It’s a trap for the folks that don’t see it coming... but it’s good news for the folks prepared to take advantage of it.
If you’ve been waiting to lock in a mortgage, take out a home equity line of credit, finance that new boat or invest in rate-sensitive assets, here’s your chance.
But please... only take out that new loan if you’ve already broken your bowl in half. We’ve already got a government that took on too much. You don’t need to join them.
Our broken bowl theory is spreading. Lets hope the right folks hear the message.