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The Post Doesn't Scare Me

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Tuesday, 08 October 2013 18:14

The Washington Post told readers that a chart showing a spike in the interest rate on Treasury bills coming due on October 31 should scare us. The rate on short term notes has gone from near zero to around 0.29 percent. This is a huge hike in own percent, but it is still a pretty damn low interest rate.

The story here is pretty simple. These short term bills get much of their value from the fact that they are hugely liquid. Because of concerns over the debt ceiling they are no longer hugely liquid. Okay, this is not good news, but I just can't get that scared over this. The financial markets will not freeze and the economy will not shut down because the interest rate on these notes is getting close to 0.3 percent.

Pushing the government against the debt ceiling is not smart and not going to be good for the economy (unless it ends the dollar's status as the preeminent reserve currency), but we should refrain from telling horror stories.

Comments (3)Add Comment
Do Not Run. Walk to the Nearest Exit. This is Not 1929. Repeat ...
written by Last Mover, October 08, 2013 9:23

Are you sure about this? Rumor has it that in some circles among the upper echelon of the 1%, individuals are gathering at bridges and top floors of high risers for the big jump like happened in the '29 Great Depression when their wealth vanished overnight.

.3 percent may not sound like much but for a millionaire it can be lot in absolute terms, certainly enough to set off a panic of selling.

Don't cut WaPo short here. The Tehadi Terrorists need confirmation that the suicide pact act is working and this may just be the sign they need to follow through on the deed. It's just a matter of who goes first, them or the 1% who financed them.

Game Theory 101.
Oliver blanchardesque
written by Jim, October 08, 2013 11:31
This scare tactic is similar "public debt and in some cases private debt remain very high, and fiscal sustainability is not a given." If the IMF partners with the Fix the Debt folks, I may just give up hope.
It scares me.
written by Andy Harless, October 09, 2013 12:07
I think you're missing the point here. The spike in rates, though quite small in absolute terms, is evidence that the market is taking seriously the possibility that a default could happen. Nobody really knows what the effect of a default would be. You can make plausible arguments that it would have almost no effect, or even a favorable effect, or that it would dwarf all other financial disasters in our history. It's unfortunate that we're so ignorant, but this is not a question that I would want to settle using the experimental method. If we weren't seeing a spike in one month bills, it would suggest that markets are confident that a default is not going to happen. But clearly they are not confident.

Indeed, "the financial markets will not freeze and the economy will not shut down because the interest rate on these notes is getting close to 0.3 percent." However, quite possibly, the interest rate on these notes is getting close to 0.3 percent because of anticipated subsequent events that may cause the financial markets to freeze and the economy to shut down. When current events predict possible future disaster, there is a reason to be scared no matter which direction the causation goes.

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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.

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