Pondering Cramer's Call to Issue More U.S. Debt

Issue $1 trillion in 30-year treasurys?

This was the solution uttered by none other than Jim Cramer a week or so ago on CNBC. This was his solution to not raise taxes in the near-term, but, as usual, this makes absolutely no sense whatsoever. Not only could the U.S. probably not even place $1T in 30 year paper, Cramer himself admitted a top to the treasury market last week, but that would just add more long-term debt that the U.S. cannot afford.

To think that issuing more debt is the solution so the government does not have to raise taxes is probably one of the more ridiculous things I have ever heard. Sure, if you look skin deep it makes sense, but if one does the math and realizes that $1T at 4.4% interest would cost an additional $44B annually and $1,320,000,000,000 in interest payments over 30 years, well you can see where I am going with this. Statements like those make me wonder how Mr. Cramer did so well as a manager for all those years because clearly numbers are not his strong suit.

The interest payments are just part of the problem as we have an already crippling amount of debt on the books and higher taxes are a must, not that I am happy about it, but come on: Reality is here folks. Let us not forget about those 2 huge programs, Social Security and Medicare, which account for much of the $55T in unfunded liabilities the US has yet to save a penny for. Those immediate issues alone mean higher taxes, oh and universal healthcare will certainly add to the deficit and mean higher taxes of some sort, regardless of what they are telling us.

Frankly, anyone advocating higher debt for the U.S. needs to have their head examined or did they forget about last year already. Debt, is not good in large amounts, I am not even convinced it is good in small amounts, but it is inevitable to have some sort of debt, usually a mortgage. Our taxes are already where they are because of our debt load and based on our current wasteful spending it is a certainty that taxes will go higher.

To advocate more debt to postpone taxes is irresponsible because you need to pay interest on that debt and record low interest rates is no excuse to go crazy issuing more paper as it will eventually drag down GDP as our debt service payments grow and the dollar plummets.

Comments

[jeremiah74:]

there is revenue and there is cash flow.
issuing debt is cash flow (positive cash flow). taxes are a revenue. or in another way of phrasing it; from the governemnt's perspective; taxes due are an asset, and issuing debt is a liability

if Cramer (or anyone in this industry) doesnt know the difference between the two, he is even more pathetic than I ever thought..

Sep 23 06:33 AM

[coldcall:]

yes Cramer is more pathetic than we thought already!

The only guy on CNBC i pay any attention to is Rick Santelli. Okay he is a little over the top but he usually knows what he is talking about.

Sep 23 07:14 AM

[chap08:]

The reason I'm no fan of Cramer is that I prefer comedians to be funny.

Sep 23 07:44 AM

[TCK:]

Higher tax rates are not the solution either.

Without pulling out a Laffer Curve, common sense might tell you that raising rates does not guarantee that the government will collect more money !

Sep 23 09:06 AM

[john1940:]

Ridiculous is the right description for this idea. An offering of that size for 30 year bonds couldn't be sold at an affordable interest rate. Worse yet, even with the bond proceeds and assuming it would create some breathing room on the US Treasury's maturities, there is still an enormous looming problem. In ten years, at the current rate of borrowing and future cash flows with current and proposed programs, the US will have to borrow money to pay interest. That will be the end of borrowing by the US Treasury. I can't wait.

Sep 23 09:50 AM

[Mad Hedge F...:]

adf Reviewing the current political and monetary landscape, I would be remiss, irresponsible, even negligent, if I didn’t revisit one of my favorite ETF’s, the Proshares Ultra Short Treasury Trust (TBT). This is the 200% leveraged bet that long Treasury bonds, the world’s most overvalued asset, are going to go down. While the Fed is going to keep short rates low for the indefinite future, it has absolutely no direct control over long rates. The only political certainty we can count on it the continued exponential growth in the supply of government bonds of all maturities. Like all Ponzi schemes, their eventual collapse is just a matter of time. It’s simple a question of how many greater fools are out there (sorry China). Look at how they are trading now. We currently have the greatest liquidity driven market of all time, and the ten year is only eking out a 3.40% yield, pricing in near zero inflationary expectations. The average yield on this paper for the last ten years is 6.20%, a double from the current level. Get the yield back up to 5%, a distinct possibility in 2010, and that takes the TBT from the current $45 to $70. Sure we may get a sideways grind in yields for a few months, which will be expensive due to the mathematic idiosyncrasies of the 2X ETFS. But a security that is unchanged if I am wrong, and doubles if I am right is the kind of risk/reward ratio that I will take all day. And I believe that in my lifetime Treasuries may lose their vaunted triple “A” rating and be priced closer to subprime (warning: I am old). That could enable the TBT to deliver the holy grail of trades, your proverbial ten bagger.

Sep 23 02:09 PM

[User 80372:]

Hey! The state of California does it all the time

Sep 23 02:22 PM

[Think-About-It:]

Many wise investors (such as Jim Rogers) state that U.S. treasuries are an over-priced asset yet they are waiting to short them. Perhaps Rogers is waiting for them to approach "bubble-status" as he claims to have acted to early on his ideas in the past because he looks further out than the masses.

I say start building your "short-Treasury" position now and increase it over time and on dips because it is impossible to know then the spike in rates will come or for that matter whether the increase will occur gradually. History favors the former as bubbles typically burst rather than gradually deflate.

Sep 23 03:52 PM

[User 45118:]

Cramer is a democrat and a product of wall street. Tax the next generation not the voting generation. Devalue the dollar, make it worthless, destroy wealth, then it will be fair.

Sep 23 05:17 PM

[Old Trader:]

Cramer was a "hedgie", a breed not particularly known for adopting the "long view/big picture" (exception for those on the macro side).

Sep 23 07:22 PM

[ebworthen:]

Of course Cramer wants the taxpayer to fund the market, it is in his best interests.

He and his hedge fund buddies will make out like bandits.

He will be dead before the bill comes due, and he will make enough to set his kids up.

It is also the only way for him to keep doing Mad Money; no one would watch it if he was honest about stocks.

Sep 23 09:16 PM

[ebworthen:]

Agreed.

However, increasing your liabilities forces an eventual increase in revenues (taxes) which undermines growth.

The government is creating a debt bubble with both spending and increased liabilities (debt) that they will only be able to back out of by declaring war or denying healthcare and Social Security to Baby-Boomers and Generation X'ers in the future.

There will be much more of the younger generation than us, and what will we do, throw our dentures at them?

We just may wind up like British and USSR veterans and pensioners; wasting away in little hovels and powerless to change it.


On Sep 23 06:33 AM jeremiah74 wrote:

> there is revenue and there is cash flow.
> issuing debt is cash flow (positive cash flow). taxes are a revenue.
> or in another way of phrasing it; from the governemnt's perspective;
> taxes due are an asset, and issuing debt is a liability
>
> if Cramer (or anyone in this industry) doesnt know the difference
> between the two, he is even more pathetic than I ever thought..

Sep 23 09:22 PM

[User 472116:]

I have a question that I need someone to answer really badly. Here is the scenario:

Because 30 year bond interest rates are at extreme lows, the government goes ahead and sells 100 billion of 30 year bonds. Over the course of the next few months it raises interest rates which forces the interest rate on the 30 to go up as well. This means that the value of our 100 billion 30 year bonds goes down. The government then buys back the bonds in the open market making a handsome profit and screwing the investors. What is stopping the government from doing this?

Please someone answer this question.

Sep 24 02:08 AM

[jeremiah74:]

User 472116
when the governement buys back the debt later on, they will have to finance that purchase as well. at a higher interest rate..
so either way, raising rates will cause borrowing costs to go up

there is one thing though.. if the governement can cause the yield curve to steepen (30yr goes up more than what they raise) and then buy back the bonds funded by issuing shorter term debt than it can book a profit. it will still be paying higher rates on the existing debt..

so... what one can conclude is that, when the yield curve very steep the govt can reduce its borrowing costs by buying back long term debt.

i hope it helps.. let me know.

Sep 24 09:25 AM

[User 472116:]

yup thanx a lot

Sep 25 12:02 AM