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May 9, 1997
In a week with little economic news, the markets abandoned some of their budget euphoria. T-bonds rose near 7.00% and 30-year mortgages are back to the low eights.
A balanced budget has been the holy grail of the Treasury market for thirty years. Finally, the Treasury will not be raising new money in the market every other day, only rolling over existing debt. Surely the absence of such a big borrower will help rates to fall more, and soon.
Don't be so sure.
First of all, the Treasury's appetite for new money was no longer a big deal, anyway. Jimmy Carter's last deficit, at $70 billion out of an $600 billion budget in a $2.5 trillion economy, was a much bigger affair than $110 billion in a $1.7 trillion budget and nearly $8 trillion economy.
More important is the fleeting nature of the balance. A mere six months of shallow recession would throw the budget way out of whack all over again. Worse is the likely behavior of our representatives.
See, the average Congressperson never wanted a deal in the first place -- except on his or her own terms, while accepting the surrender of the opposition.
This spring, the opposing camps were drawn up in the same lines as in the last thirty-six (to be exact) springs. Like opposing troops of baboons, they were once again ready to howl at each other across a carefully defined safety zone, never having the slightest intention to retreat, compromise, or actually cross over to fight.
This shrieking triumph of form over substance was interrupted by the Treasury's tax receipt windfall. The safety zone disappeared, a surprise which is terribly embarassing to baboons everywhere.
Put up or shut up! What are you going to do? Change your shouted position, so as to make a deal impossible? No time for that: it all happened too fast. No CPI adjustment necessary; Medicare cuts already agreed upon will do just fine, thanks. Tax cut? Why, sure. Nothing to argue about.
Yet. All these Congresspersons have to visit the voting primates at home. The loudest of these don't want their local Democrat/Republican to cut a deal of any kind with opposing Republicans/Democrats, and so the pressure will grow to find new ways to restore a deficit, and restore a howling ground.
One example of new argument, painfully close to home, took only 24 hours to develop. The budget deal is supposed to include a capital gains exemption for home sales. However, the Clinton version of the deal tightens the rules (dollar for dollar, naturally) for 1031 exchanges. Trades of "excessively dissimiliar" properties -- land for house, or house for commercial -- would no longer be allowed.
On such an invented policy altar does a good idea make the ultimate sacrifice. Oooowwww!
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