Bush Gives Bond Investors Reasons to Doubt Deficit Will Drop
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Aug. 25 (Bloomberg) -- U.S. President George W. Bush has given the bond market at least half a dozen reasons to tumble, and the 10-year note and other U.S. Treasuries have obliged with the biggest two-month decline in two decades.
``There are clear doubts in the bond market that Bush can pull off a recovery and lower the deficit,'' said David Brownlee, who helps manage $7 billion in bonds at National Life Investment Management Co. in Montpelier, Vermont. The government will shoulder ``a high deficit for quite a while.''
The 10-year note has dropped 7 percent since the start of July, the largest decline in any two-month period since 1983. The yield reached its highest in a year for 10-year notes. Yields on the two-year and 30-year Treasuries also hit highs for the year earlier this month.
Bush's troop commitments are spread from Afghanistan to Iraq and now Liberia. His tax cuts are adding to a record U.S. deficit exceeding $400 billion. And his efforts to stimulate the economy haven't created jobs to offset the drop in tax receipts.
The 2003 deficit, which the Bush administration estimates will be $455 billion at the end of the fiscal year on Sept. 30, is about 4.6 percent of the $10 trillion economy. Next year's deficit is forecast to reach $475 billion and those projections don't include all the costs for the occupation of Iraq. At that level, the deficit may amount to a higher proportion of national output than the $290 billion deficit of 1992. The 1992 shortfall, a record at the time, was 4.7 percent of GDP.
Calculations by the Brookings Institution show that a deficit equal to 1 percent of gross domestic product raises long-term interest rates by 30 basis points, said Peter Orszag, a fiscal policy expert at Brookings, an independent, non-partisan research organization based in Washington. He forecasts a long-term deficit of about 3 percent of GDP.
Interest Rates
As the Treasury sells debt to finance the deficit, the expanding supply of bonds pushes interest rates higher, constraining consumer spending, mortgage borrowing and corporate investment.
``Any more big moves in the deficit up will create a problem,'' said Steve Kellner, who oversees $48 billion of investment-grade corporate debt at Prudential Investment Management.
The government will have to almost double its borrowing during the year beginning Oct. 1 to finance its debt, according to estimates by Barclays Capital Inc. The Treasury will have to sell a total of $940 billion in securities in order to refinance $493 billion in coupon debt and raise $447 billion in new cash, Barclays said.
Stimulus
The 10-year Treasury's yield is expected to increase to 5 percent by the fourth quarter of 2004 from 4.47 percent on Friday, according to the average forecast of 52 economists surveyed by Bloomberg News.
``As far as the Treasury goes, their deficits will be growing for some time,'' said James Evans, who helps invest $15 billion of bonds at Brown Brothers Harriman & Co. in New York. ``Most investors figure there will be stimulus up the wazoo to get employment growth.''
Deficit concerns are overblown, said Kevin Hassett, a senior fellow at the American Enterprise Institute, an independent, non- profit research organization in Washington. ``You'd rather not have a deficit, but it's not going to have the doom that some people are forecasting,'' he said. ``There's not really much evidence that indebtedness changes anything.''
Finding Jobs
Bush, who entered the White House with a federal surplus of $127 billion for fiscal 2001, said the deficit is chiefly the result of a recession in 2001 and the cost of war in Iraq and can be cut in half over the next five years if Congress holds down long-term spending. He said that after initially adding to the deficit, his tax cuts are intended to bolster the economy.
``I am more concerned about somebody finding a job than about numbers on paper,'' Bush told reporters Friday.
The U.S. lost 44,000 jobs in July, a sixth straight decline, the government reported earlier this month. Almost 2 million jobs have been lost since Bush took office in January 2001.
A ``jobless recovery'' may lead consumers to hold off on spending, slowing growth. The rise in mortgage rates -- a percentage point over the past month -- has ``taken the wind out of the refinancing boom,'' also threatening spending, said Robert Parry, president of the San Francisco Fed Bank.
There are some signs of a recovery, with the economy expanding 2.4 percent in the second quarter, and that also plays against the bond market by raising the risk of inflation eroding the value of fixed-income investments. No help is likely from the Federal Reserve, which has indicated it won't raise the benchmark interest rate any time soon to stave off inflation.
No Help From Fed
The economy will need ``more than a few quarters'' of strong growth to reduce unemployment and excess capacity, so Federal Reserve policy makers intend to leave rates at 45-year low of 1 percent to boost growth and ward off deflation, Parry said Friday at a speech in San Diego.
Bush has said the $1.7 trillion in tax cuts since he took office will spur sustained growth, increase tax revenue, and pare the deficit by early next year, months before the November presidential election.
``If all the stimulus that's in the pipeline isn't enough to get this economy going, then I think the president's going to be in political trouble,'' said Stephen Stanley, an economist at RBS Greenwich Capital in Greenwich, Connecticut.
Costs in Iraq
Deficit projections don't include all the costs of occupying Iraq, now running at an estimated $4 billion per month. The projections for the occupation over the next three years range from $100 billion to $600 billion, said Representative Peter Hoekstra, a Michigan Republican on the House budget committee.
``Iraq is a big part of the deficit number and the reason for the skittish market outlook,'' said Ken Anderson, who helps manage $65 billion in bonds at Evergreen Investments in Charlotte.
With U.S. peacekeeping in Afghanistan costing $950 million each month, annual war costs already total about $50 billion.
``That's a significant amount of money,'' equivalent to about one-half percent of GDP, said Steven Koziak, a defense analyst at the non-partisan Center for Strategic and Budgetary Assessment. Lawmakers in the House and Senate are unlikely to heed Bush's calls for ``fiscal discipline'' prior to the 2004 elections, said Paul Samuelson, a Nobel laureate and economic adviser to President John F. Kennedy and other Democratic chief executives.
Congressional Spending
``An election year is not a time to count on limited spending by Congress,'' Samuelson said.
Both Democrats and Republicans are advocating a program to subsidize prescription drugs that could cost more than $400 billion during the next decade. Also, the Bush administration has yet to include in its deficit estimates the cost of stabilizing Liberia and achieving peace and economic renewal in Iraq.
Bush's forecasts that the federal deficit will register $200 billion at a minimum at least until 2008 are ``fanciful without a fairly major tax increase, which politically isn't likely,'' said Robert Reischauer, president of the Urban Institute and a former Republican-appointed director of the Congressional Budget Office.
``We're probably, realistically, looking at $400 billion deficits as far as the eye can see,'' he said.
Last Updated: August 25, 2003 00:15 EDT |
