Shotgun Marriage: Bidenomics and Wall Street Get Fitched

Peter's Market Wrap for the Week Ending 8.4.23

What happens when you “Fitch” your wagon to Bidenomics?  The American government gets its credit rating downgraded, and a big barrel of cold water gets dumped over the heads of the Wall Street bulls.

That Fitch downgrade of US Treasuries on Tuesday was pretty much the big news this week – along with a rather mixed jobs report.  But let’s stay with Fitch or a minute because it was the first big crack in the façade of Bidenomics.

No one really should have been shocked when top global ratings agency Fitch downgraded the US government’s top credit rating from AAA to AA+  given the fiscal cliff that the Biden regime and a coalition of Democrats and RINO Republicans on Capitol Hill have sent us hurtling down with a series of irresponsible multitrillion dollar spending bills.  Yet, Treasury Secretary Janet Yellen bitched and the White House moaned and, of course, they incredulously blamed the Republicans.  But the reality is this never should have happened.

Here, the globalist elites who run this country in Washington and from Wall Street ritually portray America as a fortress of democracy and as a bastion of financial security for the world.  It is our birthright, they say, for credit agencies around the world to treat investments in US government bonds as the safest investments in the most stable country of the world. 

Yet, in the space of less than three years, Joe Biden has shaken the very foundation of our democratic system with his partisan assaults on President Trump and his advisors and election interference.  Indeed, Biden’s weaponization of the FBI and Department of Justice has reached such new lows that America now shares in common with Third World countries like Brazil and Pakistan this infamy:

The judiciaries in all three countries have, or are trying to prevent, Trump-like figures – Bolsonaro in Brazil, Khan in Pakistan, Trump himself in the USA -- from ever running for president again.  To say that this threatens the stability of our country is to state the obvious.

At the same time, the economic policies of Joe Biden and a Uniparty Congress have sent us hurtling towards a massive fiscal cliff, the likes of which we have never seen in our history.  Here’s the fundamental conundrum facing this country that the Fitch downgrade fully exposes:

·         Government spending is out of control and will create unprecedented debt levels.  

·         It will cost more and more to finance this hemorrhaging US government debt.

·         It will cost more not just because the debt is growing – and growing far faster than tax revenues -- but also because interest rates are rising. 

Consider here that the average interest cost on debt is about two and a half percent.  However, under Bidenomics, this average will roughly double as existing debt is rolled over and new debt must be financed.

As a practical matter, this rising interest cost burden will make it more and more difficult for the US government to finance all of its various functions – from education, transportation, and defense to Social Security, Medicare, and border security (if we still have that). 

Politically, of course, push must come to shove – inevitably, services must be cut or, more likely, taxes must be raised.  By one estimate, the US government will have to raise all taxes by nearly 30 percent just to cover these rising interest costs.

But wait: Raising taxes will likely be a political non-starter.  So what’s the third option?  Here’s the answer as well as the buried lead:

When Fitch downgrades treasury securities, the agency is not really worried about any kind of classic default on the bonds.  Rather, Fitch, along with the rest of us, know full well that the other way of financing all of this Bidenomics destruction besides the political difficult route of tax hikes will be for the government to simply print more money.

Of course, this government printing press will fuel inflation and thereby devalue any bonds that are currently being held – and THAT’s precisely the risk:

The risk is not one of default but rather that of the monetization of the debt in a way in which the real value of the debt and therefore the real value of the bonds will fall.  And lest anyone think that this could somehow turn out to be a good deal for America – solve our fiscal woes by screwing bondholders – just remember that this scenario comes with massive inflation which, the last time I looked, remains the “cruelest tax” hitting the working classes and Deplorables of this nation the hardest.

House Republicans will of course have another swing at forcing the Democrats into fiscal responsibility but, thanks to House Speaker Kevin McCarthy, it won’t come before the November presidential election in 2024.  In the meantime, Wall Street is at least starting to squirm as the reality of Bidenomics sinks in.  Who will be left holding their portfolios when the bullish music stops?  Stay tuned.