Friday, March 26, 2010

Investors View Berkshire Hathaway As Less Risky Than US Government

For the first time in over 20 years, US government debt traded at a higher interest rate than debt from a private company - Berkshire Hathaway. This is an indication that the financial markets are concerned about the healthcare bill's effect on the US deficit and economy. See the following post from Daily Wealth.

It should go down as a historic moment...

But hardly anyone noticed.

The same day the health care bill passed, U.S. government debt lost its "risk-free" status.

That day, for the first time in over a generation, the U.S. government was a worse credit risk than a U.S. company.

Specifically, investors were willing to accept a lower interest rate to lend money to billionaire Warren Buffett's company, Berkshire Hathaway, for two years than to lend to the U.S. Treasury for the same period of time.

It shouldn't be possible... after all, the government prints the money... how can it be less likely to pay off its debts? But it makes sense on the other side, too. You can easily see how billionaire Buffett's company is less of an actual credit risk than our government, which is on the hook for tens of trillions of dollars of promises.

It's not even just the world's richest man who's grabbing lower interest rates than Uncle Sam... Heck, even home-improvement store Lowe's can borrow money at a cheaper rate than the U.S. government.

Here's how my good friend Porter Stansberry explained it earlier this week:

Congress says by spending an extra $1 trillion on health care over the next 10 years and raising taxes substantially (but only on the wealthy, of course), our annual deficits can be reduced... This has to be one of the most outlandish claims we've ever seen politicians make. It will so surely end up being a financial disaster that the bond market has actually begun to price government obligations at higher interest rates than highly rated private companies...

We believe the debt of nearly every government in the world will soon trade at a significant premium to the best-run private companies.

The reason is quite simple: As long as they don't have to pay for it, people will always vote for more government spending. That leads politicians to implement strategies that shield the true costs of government spending from the majority of voters – using debt and steeply progressive taxes. Today, roughly half of all Americans pay zero federal income taxes. As a result, it's not hard to win an election promising more things, like "free" health care.

This isn't really a political problem. It's actually an economic problem. There's a structural asymmetry between the people who approve the budgets (through elections) and the people who have to finance the budgets. Eventually, this will lead to a complete fiscal collapse. And it's going to happen a lot sooner than people think because the bondholders aren't stupid. They can see where the trend is heading. And that's why, as of today, it costs OBAMA! more to borrow money than Warren Buffett.

The problem is, once creditors begin to fear more and more paper will simply be printed to pay these debts (and, of course, that's what will happen), interest rates will rise. And they could rise suddenly. That would force governments to spend vastly more money on interest payments than they expect. That's the big problem right now in Greece, for example. I believe the U.S. will be spending close to 25% of its income tax receipts on interest by 2015. That's simply not sustainable.
The Obama administration believes the health care bill is "historic." Obama meant historic in a good way. The bond market recognizes it's historic in a bad way...

The passing of the legislation marked the first day in decades the bond market thought highly rated corporate bonds are a safer bet than the people who print the money.

The market decided a bet on bonds from our government is no longer risk free... It was a historic day.

The way to play it is simple, and you've heard it before... but it's right. Sell government bonds and buy gold (the currency that can't be printed).

This article has been republished from Dr. Steve Sjuggerud's blog, Daily Wealth.

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