Who Can Really Veto the President or Congress?

Written by Hank Brock, CPA, MBA, CLU, ChFC

Who can veto congress?

While the American public thinks economic policies are determined by the President, Congress, or the Federal Reserve Board, there is a select body of voters that maintains virtually instantaneous veto power. They aren't elected, and many are citizens of other nations.

They are those people who finance the U.S. deficit by buying government bonds. They come from all around the world; many are Chinese, Japanese, and middle-easterners. Because of them, we are able to live in our excesses without re-igniting inflation. (Foreign buyers of government bonds are the major reason we haven't had our day of reckoning with our massive deficit.)

But if our government proposes unwise policies that will drive up inflation, chances are world bondholders would swiftly begin selling their bonds, driving bond prices down and interest rates up, perhaps even plunging the country into recession. They can be tough disciplinarians.

In the early 1990s Sweden saw how swiftly this could occur. After a particularly unwise bill was signed into law, their bond market rapidly drove interest rates up to almost 200 percent on government bonds, forcing the government to reverse itself.

The U.S. bond market is four times the size of the stock market, with trillions of dollars of government debt. With our enormous deficit, bondholders are rightfully concerned about inflationary spending policies.

Currently, interest on the national debt is about one-fourth of the federal budget. What would happen if interest rates doubled within just a couple of years, as they did 1979-1981? Our economy is more highly leveraged today than it was then. The U.S. government has engaged in short-term borrowing (Treasury bills) to finance long-term projects. This mismatch means rising interest rates are felt more quickly as it rolls over its debt.

Corporations and people understand that you don't borrow short-term to invest long-term. That is like buying a home with a one-year mortgage. So what happens? If government spending exceeds the government's ability to tax or borrow, all it can do is turn on the printing press and inflation skyrockets.

Hank Brock is President of Brock and Associates, LLC, a fee-based financial planning firm specializing in asset protection and generational wealth preservation. For more information on how to protect yourself during these volatile times, schedule a free consultation.