Jul 06, 2011 at 12:16 am
Listening to the radio tonight, I heard some economics commentator give yet another rant about how our debt has reached crisis proportions, we’re borrowing billions a day, the end is near, yada yada. The moderator had the presence of mind to inquire how this could be so, when our gov’t is able to borrow at such low rates.
“The bond market is crazy…traders are in denial…it’s a bubble…the end is near…yada yada,” came the reply.
I always have the same thoughts when I hear this:
–the bond market is global, and it is pricing risk very differently in countries with very different sovereign debt profiles (the figure shows the percentage-point difference in 10 year gov’t bond yields between the US and these other countries):
–ergo, the market cannot be selectively crazy, i.e., sane when pricing Greek, Irish, or Portuguese debt, crazy when pricing US debt.
So I reject this particular hysteria. US debt is cheap because it’s a risky world out there and we, along with Germany, remain among the safest bets. Investors may be getting nervous, but the price signals tell us they believe Congress will soon stop screwing around and raise the debt ceiling.
But that could change. If we do not resolve this avoidable crisis, it could change quickly. And if we should lose the confidence we have built up over more than 200 years of trustworthy performance in domestic and global markets, it could take a very long time to regain the world’s faith in our markets.
That would be a tremendous and terribly costly mistake that could threaten the living standards of American families for years to come.
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