CEPR - Center for Economic and Policy Research

Multimedia

En Español

Em Português

Other Languages

Home Publications Blogs Beat the Press Markets are Fearful That U.S. Debt Is Unsustainable -- That is Why the Interest Rates on U.S. Bonds Fell

Markets are Fearful That U.S. Debt Is Unsustainable -- That is Why the Interest Rates on U.S. Bonds Fell

Print
Sunday, 09 May 2010 16:21

The folks who couldn't see an $8 trillion housing bubble are spouting off like crazy about what the Greek debt crisis means. The NYT told us that: "While the immediate causes for worry are Greece’s ballooning budget deficit and the risk that other fragile countries like Spain and Portugal might default, the turmoil also exposed deeper fears that government borrowing in bigger nations like Britain, Germany and even the United States is unsustainable."

Fears that government borrowing in the United States is unsustainable should manifest themselves in higher interest rates on long-term government bonds. Unfortunately for this story, the interest rate on long-term government bonds fell last week. So, the NYT wants us to believe that investors are more fearful about the status of U.S. debt, but they were willing to hold it at lower interest rates?

Umm, no, this is a "night is day" line. The NYT is telling us something that it 180 degrees at odds with what we see in the world. There are large numbers of wealthy and politically powerful people who want to scare the public about the U.S. debt in order to advance their agenda of cutting Social Security and Medicare, but the events of last week point in the opposite direction. Investors still have great confidence in the ability of the U.S. government to pay its bills.

The theme of deficit hawks was further reinforced in the next paragraph which told readers:

"'Greece may just be an early warning signal,' said Byron Wien, a prominent Wall Street strategist who is vice chairman of Blackstone Advisory Partners. 'The U.S. is a long way from being where Greece is, but the developed world has been living beyond its means and is now being called to account.'"

The savings for the developed world as a whole is determined by its trade deficit or surplus with the developing world. The latter is determined primarily by currency values of the level of output in various countries. As a result of conscious policy by the United States and the IMF, the dollar rose sharply in value against the currencies of most developing countries in the late 90s (following the East Asian financial crisis). This laid the basis for the huge imbalances associated with the stock bubble and the housing bubble.

The complaint about inadequate savings belongs at the door of the U.S. Treasury and IMF. It was the explicit and intended result of their policies. The moral haranguing about people not saving enough is utter nonsense that belongs in gossip pages, not in a serious newspaper.


Comments (4)Add Comment
5 week decline in long-term rates
written by flow5, May 09, 2010 6:31
"Unfortunately for this story, the interest rate on long-term government bonds fell last week"

You ignore the factors that determine the demand for and supply of loan funds. The actual reason for these downdrafts is that the FOMC pursued an unusually "tight" monetary policy. A "tight" money policy is one where the rate-of-change in the proxy for the real economic output of product and service growth drops well below the rate-of-change in the proxy for most inflation indices. This is of course inviolate & sacrosanct.



...
written by izzatzo, May 09, 2010 10:14
"The savings for the developed world as a whole is determined by its trade deficit or surplus with the developing world. ... This laid the basis for the huge imbalances associated with the stock bubble and the housing bubble."

Greenspan says something similar to get himself off the hook, claiming a global savings glut was the reason the Fed couldn't slow the economy down and put downward pressure on the housing bubble as well (regardless of failing to acknowledge it explicitly), because international currency pressures offset and dominated the outcome in the opposite direction.

Yet when it comes to taking specific measures to reverse the acknowledged power of the global savings glut in the opposite direction, everyone but a few like Baker and Krugman suddenly go mute and start wailing about internal factors like sovereign debt and solvency via a Greek domino effect that threatens the value of the dollar.

If it's powerful in one direction, it's powerful in the other direction.
Gobbleygook!
written by JoeK, May 10, 2010 10:39
Flow5, your comment is consistent with the sort of incomprehensible language Greenspan used for a long time. Of course we now know it was nonsense.

If you're just parroting some economic textbook, why not just cite it, and spare us the stilted prose. If on the other hand you think you actually understand what you're saying, why not write it in plain english, so us amateurs can evaluate it and perhaps learn something.
Who is rating US Treasuries?
written by skeptonomist, May 10, 2010 10:41
Here's another reason for eliminating private bond-rating companies. After demonstrating their incompetence in the rating of CDO's, Moody's has been threatening to downgrade US Treasuries, for no actual economic reason (there has obviously never been a default). Money paid for bond ratings apparently goes partly into propaganda for the Republican party, which wants to saddle Democrats with the blame for deficits, and for those big-money interests who want to cut SS and other entitlements.

Write comment

(Only one link allowed per comment)

This content has been locked. You can no longer post any comments.

busy
 

CEPR.net
Support this blog, donate
Combined Federal Campaign #79613

About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

Archives