Just as the U.S. government is being criticized for a huge deficit and an inability to control its growth, the cost the Treasury spends to raise money has fallen sharply. It is an example of bad deeds that go unpunished. It is also an example of what desperate investors will do when they want safe havens.

Congress set a plan to take something like $900 billion out of the budget over the next decade in exchange for an increase to the debt cap of $1 trillion. Another $1.5 trillion is to be cut based on the work of 12 Congress members who will find more government expenses to reduce and rewrite the tax code. If that does not work, a series of mandatory cuts will go into effect. The process is cumbersome and could eventually be altered by Congress representatives elected in 2012.

Many members of the public and capital markets investors see the cuts as far too little to bring down a U.S. deficit that has run well above $1 trillion for the last two years and could remain near that level for another two. A prolonged economic downturn could make those negative figures even worse.

The rate that the Treasury pays to raise money has fallen sharply in the meantime. Treasury 10-year yields fell to near historic lows yesterday as the markets plunged.

The U.S. government could stay lucky for some time. The tremendous size of the market in American debt makes it unbelievably liquid and global investors seek safety in bonds that are still Aaa rated. A new recession and stock market sell-off could drive down the rates the Treasury pays even further, just as the American deficits and debt levels rise.

The yield situation should not be taken likely. Some forecast that the U.S. debt service payments could be near $1 trillion in 10 years. That will make any effort to close deficits later in the decade all the more difficult.

As the U.S. government becomes more dysfunctional and America’s financial situation worsens, trouble in the equities markets may well help lower a portion of the costs of overspending. Some bad deeds do indeed go unpunished.

Douglas A. McIntyre

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