Government bonds: financial disaster

In the June Market Watch article, we discussed the possibility of a bond market crash. Since then, yields on bonds have zoomed. Bond prices have dropped dramatically. Government bonds are decreasing in value because the public is unwilling to take interest payments of 1.5% to 2% annually for the risk of holding government debt. Bond buyers are aware of the fact that U.S. spending is much more than tax revenues. They see the market can no longer sustain such borrowing to support government spending.

The Fed has controlled interest rates as long as it could; now the law of supply and demand is taking over the bond market. Of all federal government annual expenditures, 43% must be borrowed. There is no way out of the dilemma without drastic cuts in government spending. Because the entire 43% deficit goes to welfare recipients, politicians are unwilling to cut the deficit and risk the loss of votes of the 40% of our population that is receiving welfare benefits.

Politicians want us to believe a “modest” tax increase is needed to close the gap between government expenditures and the income taxes. The top 10% has increased total income taxes paid from 55% of all income taxes in 1986, to 71% of all taxes paid today.