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Federal Deficits, Treasury Notes, and Investments; The Shape of Things to Come

It was Illinois Senator Everett Dirksen who in the 1960’s said in regard to the federal budget, “A billion here, a billion there and pretty soon you are talking real money.” It would seem that the saying is still true, but only if you substitute “trillion” for “billion”. Another prophetic Dirksen quote is, “I have said, with respect to authorization bills, that I do not want the Congress or the country to commit fiscal suicide on the installment plan.”

Borrowing, Inflation, and Investment

One of the many reasons why long term, buy and hold investments have worked is that a slow steady inflation increases the size of the numbers attached to your wealth even if you buying power does not go up. Needless to say the invention of new products and materials and improvements in efficiency make companies more productive and more valuable in real terms so it is never all about inflation. But, in recent years a lot of our presumed success has been based upon inflated values and well as the phantom value of derivatives.

Over time governments tend to allow and even encourage inflation, usually by borrowing against the future. A simple, one line explanation for the current economic crisis might just be that time just ran out on the inflation gimmick.

To the extent that the current government rethinks the issue of inflation in governing we could see a new world of investment based upon company value minus the steady inflation imposed by a progressively less valuable currency. On the other hand the need for a huge cash injection into the economy will, by itself, serve to continue the “inflation game.” The US treasury just announced the reissue of 7 year notes. It would seem that folks are wary about holding US dollar instruments for 30 years.

What Constitutes a Stimulus Package?

There is the usual complaining in congress about where the “benefits” of the “bailout” are going. It would seem that the government is going to do its best to keep credit markets open so bank bailouts will go forward and the US Treasury will issue seven year treasury notes in addition to 30 year treasury notes.

However, much of the “stimulus” is going to go into things that have a lasting measurable value. A prime example was given by President Obama recent in an interview. He noted that putting people to work winterizing homes across the Northern United States provides jobs both in on site work as well as manufacture of appropriate products. In addition the President noted home winterization saves on heating bills and reduces the need for foreign oil.

The Shape of Things to Come

There is already evidence that putting tax breaks in people’s pockets helped raise spending last year. Putting people back to work will be better. The cost of the bailout is going to drive up the deficit so there will be a price to pay down the road.

The question for those with investment capital is where to invest and what to stay away from. A less consumer driven, inflation driven economy would require buy and hold investors to look more carefully at company fundamentals and rely less on overall market growth. In a world that is cash poor, cash is king. In an inflationary world you want gold. In a world where oil is cheap and bound to come back you want to buy big oil when it bottoms. In a world on the verge of curing diabetes, Alzheimer’s disease, and Parkinson’s disease through stem cell research you want an investment or two in the right up-and-coming biotech stocks.

Considering that other economies are not doing especially well right now those seven year treasury notes are probably not a bad place to park a few bucks while you mull over the shape of things to come.





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