What to do about the debt ceiling debate

The advent of the debt crisis is like sitting through a scary movie. There is anxiety. There are anxious moments. We hold our breath. But in the end, it is just a movie. After the movie, we walk out of the theatre and life goes on. The grips that Washington has on us will soon end and business will continue. Our government will keep paying for stuff.  All bills will be paid.  In the end, the conflict in Washington will be…. just theatre.

Harry Reid said this morning” It’s time for us to be adults.” Really Senator Reid?  I thought a pre-requisite for any person taking a responsible job was to be an adult. 

The real concern is that the slowing economy happening all around us threatens to move our country into a recession. Short term, steps taken to balance the budget are not helpful to a fragile economy. Whatever resolution settlement is made in congress will surely create more drag . Any combination of tax increases or spending cuts will have the same effect.

Given this environment, where do we need to invest?  Long term treasury bonds. Long term rates have remained stubbornly high for several years. Short term rates are near zero percent while the rate on the 30 year treasury bond has been over 4% for the last several years. This spread between zero percent short term rates and over 4% on long term rates is much too large and will have to contract. The time for them to appreciate is now.

Concern over credit ratings on the US Government, the dollar, and fears of inflation have all contributed to keeping long term T-Bonds at high rates and low prices. If mortgage rates were to fall below 4%, our economy would receive a much needed medicine. Refinancing would accelerate. People would save money on interest costs. Home building and all sorts of projects requiring long term financing would pick up.  Of course the bi-product would be increased tax receipts which is just what the doctor in Washington has ordered.