Debt Ceiling Yada Yada

July 6th, 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):

Source: FT

–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.


Print Friendly, PDF & Email

33 comments in reply to "Debt Ceiling Yada Yada"

  1. casey says:

    I recently read this: [according to a Bipartisan Policy Center report,] “the Treasury Department would not be able to pay all its bills and would need to implement an immediate 44 percent cut in federal spending in the event the debt ceiling is exceeded.”

    Isn’t such a drastic cut in federal spending precisely what the Tea Party right wing in Congress wants, almost regardless of the other consequences?

    If they negotiate with Democrats, they won’t get as much of a spending reduction as they would if they don’t negotiate and the US defaults. What would be the best argument to counter this thinking?

    • Jeremy says:

      You make a very good point. If the Tea Party types don’t care about losing our ironclad safe credit status, then absolutely they do better with a default. I think some of them may care, others probably don’t think on this level.

  2. Kevin Rica says:

    U.S. debt is debt is cheap because China must buy foreign debt to fix its exchange rate. The bigger the Chinese trade surplus, the more debt they must buy and the lower U.S. interest rates must go. That is not a good thing.

    • Michael says:

      No. US debt is cheap because there are few investment opportunities in the US, and US debt is safe.

      There is a savings glut in China, and that does depress global rates a little bit. But that doesn’t explain the 40-year history of US debt remaining pretty darn cheap even during high deficit years.

  3. fausto chavez says:

    i hope we default only to see the gop commit political suicide.

  4. foosion says:

    Many of those screaming about a bond bubble are usually efficient market types. When it suits their purpose, the market is efficient and the govt should keep it’s hands off. When they don’t like the market’s answer, then the market is crazy.

    The crises at the moment are the Republicans attempt to destroy the US’s credit rating and Washington’s efforts to contract an anemic economy. The level of our debt should be way down the list of today’s problems.

    @kevin, China holds less than 10% of the US debt.

    @fausto, the GOP is betting Obama will be blamed, not them.

  5. azlib says:

    It is quite remarkable to see the persistent denial of Occam’s Razor in the face of overwhelming evidence for the simple explanation that we are in a liquidity trap which is the most elegant explanation I have seen so far for why bond rates are so low.

    • Michael says:

      There’s a good reason for that — liquidity traps imply that there exists such a thing as short-run price stickiness. And that means that Keynes was right, full stop.

      Since that is psychologically impossible to accept, then we must not be in a liquidity trap.

  6. Th says:

    My newspaper this morning told me that “both sides are digging in their heels” so I’m thinking the GOPers have a fairly safe bet that Obama gets the blame for a default. 2012 GOP ad, “We had to stand up to the Dems and not let them raise your taxes and ruin the economy.” 2012 Dem ad,”?”

    Most unself-aware statement ever – “I know how to negotiate”

  7. Dick C says:

    Yada yada is right. I watched ‘Stagecoach’ yesterday, on Hulu. It was made in 1939. The banker (who was making off with the miner’s payroll) had a line where he railed against high taxes and the amount of government debt. It should be a laugh-line by now.

  8. David S. says:

    It is important to understand this issue and its attendant gamesmanship in all the details.

    First, default would result in the loss of hundreds of billions of dollars – – perhaps trillions of dollars when credit default swaps are added to the mix – – in the values of Treasuries owned by the largest American banks and other financial entities.

    These financial institutions will not allow the GOP to destroy their wealth in this manner.

    Accordingly, the GOP threat of default is really an empty threat. Indeed, the reason why the markets have not recoiled is because the traders know this — indeed, wasn’t it reported widely that the GOP told Wall Street (more stage whisper than sotto voce)that the House vote against a clean increase in the debt ceiling was merely a Kabuki-theatre production for the Tea Party partisans?

    Therefore, the Democrats should stand firm and wait for the inevitable GOP capitulation.

    Will the Republicans admit to the their Democratic counterparts in negotiations that it is all a bluff? Of course not – – geez, the essence of the bluff is that you don’t admit that you are bluffing! (Don’t any Democrats play poker?)

    That is what makes the wink-and-the-nod to Wall Street so devastating — the GOP was unable to hide from the public its promise not to destroy the bankers’ wealth.

  9. He loved Big Brother says:

    An obvious way to fix the “error” in your graph is to default. The bond traders will drive up the cost of gov’t credit and then the Ignoratti can proclaim “I told you so”

  10. readerOfTeaLeaves says:

    Dear Mr. Bernstein, you may be aware that bond markets are global and that markets are not efficient, but someone like myself in the peanut gallery does not know these things.

    I am not busy in the bond markets on any day.
    They actually sound fairly boring to me.
    I’m not that interested.
    So when I hear some shrieking hysterical noise about the bonds! the bonds! the bonds! I do one of two things: (a) yawn, and click on another webpage, or else (b) I wonder how worried I should be. My reaction is generally premised on my view of the credibility and authority of the speaker giving the information.

    But it never, ever crosses my mind that the bond markets are ‘global’, and so your easy dismissiveness is not a tool in my intellectual (or emotional) arsenal when it comes to the kind of crazy on display in DC these days.

    You may assume that ‘we all know the bond markets are global’.
    We do not know this.
    It is outside our frame of reference.
    Also, borrrrrring….

    It’s possible that I’m the really dumbest donut in the stack.
    I know a ton of stuff, I am an ‘expert’ in some things.
    But bond markets bore me.

    So I think the Dems have to make this point that US bonds are **not like Ireland or Portugal** and **NOT** like Greece, and drive it home to people like myself, who reside mostly in the ‘dumb donut stack’.

    After all, we’ve just been hearing about Greece.
    Greece + bonds = scary!
    Portugal + bonds = super scary!
    Ireland + bonds = more scariness!!
    Ergo, government bonds must be ‘scary’ and ‘defaulty’ since that’s just about all that we’ve been hearing for months.

    Oh, except that Greeks are lazy deadbeats, who partied and now won’t pay the bill.
    Ditto all those other people.
    And now — us! Us!

    Because the background context has been:
    Bonds + government = profligate losers = scary!

    Don’t assume we know so much.
    Scary is easier for my busy, overloaded brain to process than ‘global bond markets are not always scary every single place, so take a chill pill, this will all be fine…’
    I’m all for the calm, Zen vibe, and I think we need a lot more of it right now to kind of clear out the cortisol-overload.

    A little more Zen might be a good thing right now.
    Because the ‘scary’ to me now includes external US pressures.

    I wonder how many enemies of Obama and the US are just licking their chops over this mess. How many third world tin pot dictators who have lobbying interests in DC could clean up and make a fortune if the US defaults? How many people who don’t want to cut peace treaties, or don’t want to cut trade deals, or don’t want to cut carbon emissions would prefer to have Mr Obama all tied up with the insanity in DC?

    At this point, the GOP is in my view messing with foreign policy by taking the US this far to the brink. But I am probably unusual in viewing it in this fashion.

    But what this means for US business is a scandal.
    And what it means for US foreign policy is mind-boggling.

    I will now go back to my well-worn spot in the dumb donut stack…
    But unless someone actually calmly tells a person like myself why this whole bond hysteria is nuts and to just chill out, then I don’t get the information.
    Which of course, makes for exactly the kind of crazy that will deliver the US right into the hands of our enemies.
    Now that is truly nuts.

  11. Steve Goldstraw says:

    republicans like to bash America when a dem is in the white house

    • Dan Brown says:

      No matter what party you are in, confidence is very fragile and for good reason. The risk of poor actions by government to threaten the living standards of American families for years to come, is a real fear for me.

  12. Fred Brack says:

    Surely you have read Krugman’s blogpost titled “The Obama-Keynes Mystery.” You can help solve this mystery. You MUST help solve this mystery.


  13. Harry Mattison says:


    The permalinks for the 2 most recent posts on your blog do not work

    The Straight Story on Comparative Taxation –

    Budget Deals of the Past and Their Revenue and Spending Shares –

  14. ProgAnon says:

    Speaking of the bond market, could you have a bit of a “fatherly word” with Dean Baker regarding this ridicules piece of §*!&#!$ he wrote for TNR:

  15. Antipasto says: situation of every country in the world is horrible…let’s just hope everything will be better in 5 years…

  16. Helmuts says:

    This whole issue isn’t really as absurdly disingenuous if the people pointing fingers at those greedy poor people weren’t the same ones whining about ending the so-called “temporary” tax cuts for the wealthy.

    Americans have to conduct a survey on how many yachts and vacation homes the folks have who are outraged at the thought of paying more in taxes.

  17. Melissa M. Sanchez says:

    I’ve been looking at the numbers around our debt, deficit and future liabilities for some time. Ladies and gentlemen, we are truly fu(%ed!

    I just don’t see ANY congress cutting government to where it needs to be, and even if somehow they do, the current liabilities are huge as the damage is done.

    -The debt ceiling will be raised.
    -Taxes will increase in the next few years.
    -Inflation will continue as we monetize the debt.
    -Life will be hard and the economy will suffer.

  18. Nathan Belomy says:

    That is cool you do that work. I follow economics due to my interest in the stock market and day trading. But I also am from a younger generation and with computers changing the World, question the reason for work.

  19. jack-of-all-trades says:

    US debt has always been cheap. In an unsafe world, US investment opportunities makes it possible, even trough the high deficit years.

  20. Jools says:

    yeah, today almost everybody has debts – individuals, small and large companies and now even whole governments.

    something is wrong with this system

  21. mucize iksirler says:

    US debt has always been cheap. In an unsafe world, US investment opportunities makes it possible, even trough the high deficit years.

  22. Kentucky says:

    There is a savings glut in China, and that does depress global rates a little bit. But that doesn’t explain the 40-year history of US debt remaining pretty darn cheap even during high deficit years.