We all learned last night that the U.S. government is now in the insurance business. George Bush, whose spending habits put all bleeding-heart democrats to shame, announced that the Federal government will foot the bill to rebuild New Orleans. Contrary to popular opinion, the Federal government is not some stand-alone entity that rains goodwill upon the masses. The Federal government is you and me and all the other citizens of this country. So, the insurance premiums for this disaster spending are coming from us taxpayers. More specifically, it is coming from future taxpayers the government doesn't have this money to spend, especially after sinking hundreds of billions of dollars into a useless war in the Middle East.
The bond market players are starting to figure things out. More debt means more bond issuance, which means the market will demand higher yields. It also means the Federal government is more likely to attempt to inflate its way out of debt. The results are reverberating throughout the markets today. Treasuries are falling, sending the 10-year yield near 4.3%. The rise in yields is pressuring housing stocks, which were already weakening. Inflation fears have sent gold to new highs and silver to a 4% gain for the day. Imagine where metals will go when the dollar starts weakening again!
All these developments, I believe, were already in the cards. I've noted here before that some sort of calamity, financial or otherwise, would provide the catalyst for change. Hurricane Katrina may slowly prove to be that catalyst.
Politically, George Bush's hands were tied. His approval ratings were at lows not seen since Jimmy Carter. What's a politician to do, with his fingers on the purse strings of the biggest economy in the world, other than try to spend his way back into people's hearts? At least Jimmy Carter had enough character to sacrifice himself for the best interests of the country. As for Dubya, he's got mid-term elections to worry about next year, so if there's one thing that is as certain as the tenacity of the FOMC's printing presses, it's that George Bush will continue to dig our debt hole deeper than ever.