3/24/03

Fifteen of the nineteen individuals who attacked the United States on 9/11/01 were Saudis. The President of the United States has yet to call on Saudi Arabia to account for the behavior of its citizens. A negative image of the US and the West continues to be taught in Saudi schools. North Korea has nuclear weapons and seems willing to deploy them. Iran is on a fast track developing their own nuclear capacity. And the Israeli/ Palestinian violence goes on. God forbid the attack on Iraq by US and British forces destabilizes the entire Middle East and accelerates terrorist attacks throughout the world.

That said, the action taken by the US and British Governments has made it necessary for any country, which might be a target of terrorism, to spend a larger percentage of their budgets on security, and yes, on armaments as well. The preemptive nature of the strike on Iraq sets the stage for other countries to be wary of subsequent US aggression against them. And probably of greater concern, the US-British action provides a convenient, though inappropriate, excuse for other nations such as India and Pakistan to attack one another.

In terms of global trade, has the disagreement over military action pushed China, the world's largest future market, into the arms of the Russian Bear? Russia has plenty of oil, the Chinese plenty of consumers. Have France and Germany developed such a strong bond that the European community and currency will become a more formidable competitor with the United States and Britain? Only time will tell. However, the risks of either happening are not insignificant, and the results could be awesome on the future economic growth of the United States.

Meantime US state and local governments continue to rack up growing budget deficits. These governments, unlike the federal government must balance their budgets. Since tax revenues continue to falter, states and cities must cut spending on services and fire employees. These actions create a weaker local economy, lower tax revenues and the possibly the need to cut again.

The burden of paying for increased security at this moment is falling on the already financially troubled state and local governments. Washington appears or wants to appear oblivious to these problems. Or perhaps the current administration is beginning to realize it must account for all the tax payer money it has spent and intends to spend in the future.

The Federal Government will have to issue more and more bonds to finance the tax cuts already made, the cost of the Iraqi war and occupation, the need to spend more on security and arms, and the proposed future tax cuts.

The US government bond market is in the final stages of irrational investing by investors attempting to be conservative, and the leveraged speculation of instituions, funds and others borrowing at very attractive short term rates and buying securities with longer maturities. When the bubble bursts, and it will burst, the resultant losses will feel very much like the recent stock market bust.

Yields are going higher. The credit quality of municipal issuers is declining. Hold on to your money until municipal bond yields represent the inherent risks of an ongoing economic decline and the increased demand for capital from the federal, state and local, and foreign governments.

  

This page © 2003 Lynch Municipal Bond Advisory