Debt

Low Interest Rates Today Don't Mean We're Safe From a Fiscal Crisis Tomorrow

|

The administration is arguing that we shouldn't worry about a debt crisis because investors are demanding low interest rates in exchange for loaning money to America. The argument is that if investors were actually worried about the long-term U.S. fiscal outlook, they would be expressing that concern by demanding a higher rate of return. Essentially, the administration is arguing that we can safely use interest rates as a warning system.

Fiscal crisis? Pfff. No big deal.

That's not very reassuring. As Catherine Rampell points out at the New York Times' Economix blog, when it comes to debt crises, research suggests that interest rates are poor predictors

Treasury Secretary Timothy F. Geithner tried to soothe foreign investors who might be concerned about the security of United States debt.

Mr. Geithner offered the following words of comfort: "Look at the price at which we borrow." In other words, don't worry, because interest rates are still joyously low.

But run this observation by economic historians, and you will find that it also provides little assurance.

In other research Professor [Carmen] Reinhart has found that that interest rates are surprisingly bad at predicting debt crises in the near future. The painful rise in the cost of borrowing that is typical in a sovereign debt crisis often comes on extremely suddenly, Professor Reinhart says. (After all, the assumption that just because things have been trending a certain way for a long while means they will stay that way forever is exactly the kind of logic that led to the housing bubble.)

When I got in touch with Arnold Kling about what a debt crisis might look like, he told me much the same thing. In the runup to a crisis, the rise in interest rates is likely to be swift and unexpected. Indeed, the loss of investor confidence is what triggers the resulting crisis. By the time rates rise, then, it will be too late; we'll be pushed into panic mode, and in need of giant-sized tax hikes or spending cuts very, very quickly. The administration is relying on a fiscal alarm system that offers little or no chance for course correction. Interest rates won't warn you that the crisis is coming eventually; they'll let you know it's arrived.  

Advertisement

NEXT: Worthless Canadian Initiative

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  1. Not to put too fine a point on it, but by the time interest rates start going up, it will be too late.

    1. And of course the official line at that time will be: “Nobody saw this coming!”

      1. I did.

        1. Me too.

          1. When the bond markets explode, they should blame:
            1. the Free Market
            2. Speculators
            3. Greed
            4. Bush
            5. libertarians
            6. Jews
            7. Ayn Rand
            8. Greece

            1. or 9. All the above

            2. They tried that with the last one….and the tea party ended up taking the House.

            3. You forgot AGW.

              1. Racism…? Homophobia?

                Uncomfortable footwear?

            4. it was a 125 sigma event. We should have gone through 6 eternaties before we had a financial failure like this.

    2. So, there are two solutions: you can short T-bills and the dollar, or you can vote with your feet.

      The country has accumulated unprecedented debt that cannot be repaid, a huge penalty that will burden you and other income earners for at least the next 40 years. Alternatively, imagine living with a responsible government like Hong Kong, in a Mediterranean climate like California. Chile offers a combination of pleasant climate and fewer government burdens than many others. If you’re ready to shed the debt your government has imposed upon you, it is a good destination to consider:
      http://brophyworld.com/move-to-santiago-chile/

      1. Hey Brophy, we already have a ‘libertarian’ blog whore here and his name is Greg Smith.

  2. Also, don’t forget that Timmy G. is the same guy that said he didn’t file his income taxes because he couldn’t figure out how to use TurboTax.

    1. Timmy is just the patsy…apparently too dull to know it!

  3. By the time rates rise, then, it will be too late; we’ll be pushed into panic mode, and in need of giant-sized tax hikes or spending cuts very, very quickly. The administration is relying on a fiscal alarm system that offers little or no chance for course correction.

    Could that be because Obama wants giant sized tax hikes? Government creating a problem and selling a solution of more government. It’s the SOP in DC.

    1. I always loved Harry Browne on this:

      Government breaks your leg and then expects to be treated like a hero when it offers you crutches.

    2. “Could that be because Obama wants giant sized tax hikes?”

      Clearly that is exactly what they want – greater concentration of power in DC (MISITS).

      However, in this context they don’t have a clue what’s going on. The tax hikes/spending cuts will have to be severe and immediate to alleviate what’s coming and will be done on terms unfavorable to them, and that’s exactly what they don’t want as it will likely lead to a really pissed off electorate.

  4. Investors are “demanding” low interest rates?

    Uh no.

    The Fed is deliberatly depressing interest rates.

    1. That was one of the stupidest thing I’ve heard in a while. “We want less money!” Timmeh is a monkey in a suit.

    2. “Look at the price at which we borrow from ourselves

      Fixed it for him.

      Our other major creditors lend to us in order to prop up their employment rates, or because we’re the least worst debtor out there. I wonder how long that will last.

    3. I just demanded low rates of return from my broker the other day. Errr, actually it went more like “Troll, we need to move you toward safety”…..

  5. As Bill Gross pointed out, the yields on Treasuries are remaining low because QE2 means the Fed is doing most of the buying of Treasuries. PIMCO dumped its Treasuries, so Gross does seem to be putting his money where his mouth is on this too.

    1. Actually, PIMCO did more than that: it’s short Treasuries (link is ZH, so just ignore the hyperbolic parts).

      1. Sure, Bill Gross has made billions of dollars for his clients, but look at me, I have a Nobel Prize!

  6. Don’t worry, be happy!

  7. Low interest rates today are relatively meaningless because the average duration of our bonds is 5 years and we have to keep rolling them over. To take advantage of low rates, Bernanke could take advantage and issue more long term bonds and increase the duration. Of course, that would be an indication of a lack of confidence in long term interest rates and increase rates.

    Damned if you do, damned if you don’t.

  8. I still can’t believe Fivehead Geither got another promotion after another epic fail. It’s the story of that guy’s life!
    http://money.usnews.com/money/…..-secretary

    1. Fivehead Geither

      I like that….I’ve been calling him “Eraserhead Geither” but Fivehead is better!

      1. I’m partial to Turbo-Tax Timmy.

        1. I like that “that asshole suit from Billy Madison”, but whatever works for you.

  9. If you can find an asset that will hold its value in an inflationary environment – particularly one that provides an income stream – your best strategy is to buy the asset at as high a leverage ratio you can get with a long-term locked in rate.

    1. Interestingly, your best bet is in multinational equities. For example, Coke makes 72% of their revenue outside of North America and they reprice their US sales in an inflationary environment. As a result, their shares will rise as the dollar weakens, acting as a store of value.

      1. Or guns and bullets.

    2. Yes, but under hyperinflation the income streams become problematic.

      1. Keep your house and load up on mortgage debt, taking a hit as house values fall in a collapsing economy, but pay back the mortgage with much cheaper $$.

      Or

      2. Sell the house now and rent, thereby avoiding the future capital loss, but expose yourself to paying much higher future rents.

      I don’t have the cojones for option 2, so we’ll probably just sit tight in our little castle, and put any current savings into precious metals, rather than pay down the mortgage.

      Plus, I figure our house has pretty good fields of fire. Just kidding. But I am starting to sound like Michael Gross in Tremors.

      1. here’s the thing. We’ll have neither hyperinflation, nor slow inflation, but rather, MESO-inflation. So… All your plans are doomed. Thanks washington!

        1. I still have my fields of fire 😉

          [Burt cuts off a piece of fuse for a bomb for Earl]
          Earl Bassett: What kind of fuse is that?
          Burt Gummer: Cannon fuse
          Earl Bassett: What the hell do you use it for?
          Burt Gummer: My cannon!

  10. Of course Timmy the tax cheat is the the guy who keeps claiming that not raising the debt ceiling means the government has to default on the debt.

    When he got called on that in an interview I saw by a reporter who asked why we could not just proritize interst payments first and cut back on other spending – such as Medicaid payments – Timmy claimed that would be a “default” too.

    So there you have it. The Treasury secretary making up his own “special” definition to a word that has a specific legal meaning.

    1. Hey, he’s right, we’d be defaulting on our obligations to give people “free” stuff!

  11. In the late 1950s, [Billy Sol] Estes was heavily involved in the Texas anhydrous ammonia business. He produced mortgages on nonexistent ammonia tanks by convincing local farmers to purchase them on credit, sight unseen, and lease them from the farmers for the same amount as the mortgage payment, paying them a convenience fee as well. He used the fraudulent mortgage holdings to obtain loans from banks outside Texas who were unable to easily check on the tanks. Wiki

    Eventually, when you try to borrow more money, somebody will want to see the collateral.

  12. No no no… the alt text for the photo is:

    “Yes, the second brain was installed successfully over the first one. I can hardly feel it!”

    I always sort of expect Geitner’s forehead to start glowing, and him to go, “In 13 of your earth days, the destruction will commence”

  13. I’m only in my final semester, studying Finance. So I couldn’t possibly be as smart as Geithner. But this seems pretty obvious to me; we are heading to a Greece/Portugal type debt crisis.

    1. My first week on the job I had a meet-and-greet with a retiring executive at my company where I noted that I liked the Bay but the cost of housing was ridiculous. She assured me that I just didn’t understand the premium, and my protestations about commuting distance and high debt-to-income ratios were met with derision: if a default is imminent the borrower can sell his house at a profit, and if a housing crisis comes, the wealthy will just trade down and these peripheral areas will hold value. This was late 2007. Too often in the industry, “common sense” is just an extrapolation of what occurred in the past, and there’s always a good reason why something won’t collapse.

      Honestly, the biggest recommendation I’d make to someone getting started in financial services is to always understand the distinction between market opinion and objective fact.

  14. In her post, Catherine also dumped on the S&P:

    “Given the lackluster job that S.&P. and other agencies did in rating mortgage-backed securities before the financial crisis, some critics have questioned the relevance of the agency’s latest pronouncement. But the toxic-assets track record aside, there are other reasons to discount this latest S.&P. call.”

    I guess Pete didn’t read that part.

    1. So, given their track record of wildly overstating the quality of debt issued by the powerful and politically well-connected, we should assume that if they’re considering moving it down a notch, government debt is more or less worthless, right?

      1. This is true, though. Markets didn’t react to the S&P call because S&P’s judgment was sound. What’s more likely is that a downgrade places restrictions on funds that invest in investment-grade debt, which means there is less demand and thus a lower price (higher yield) demanded for US debt. The likelihood of a downgrade has increased now that US sovereign debt is on negative watch. Additionally, there are many investors (and algos) with anxiety about Treasuries. They are determined to reduce their exposure in response to events such as these. Nothing fundamental has really changed. The three NRSROs we’ve had for the last near-decade have always been late to the party.

        IMO, it’s more of an “okay, even the bullshit peddlers are somewhat aware now” moment.

        1. I’ve some questions for you all on this topic:

          Historically, how does the current US GDP/Debt ratio compare to times past? I had thought that we hadn’t had debt like this since WW2, but I am willing to shown where I’m wrong? How about compared to other countries? Are we in an inflationary period now, or are we not, or is it that we would be with the increase in M0, but that other global factors are hiding the increase in M0 from being an increase in prices? I thought that a lot of the rise in commodities was due to the increase in M0, no? (I know that inflation does not refer to an increase in prices, rather an increase in monetary supply, but I did think the two were usually related.)

          If the U.S. Gov’t wanted to pay down debt, would it be able to in the current economic climate without instituting some Argentine austerity type solution or official devaluing of the currency? I got told this, and think the statement is so wrong that it hurts, but lack the cites and evidence to show just how wrong it is.

          Thanks as always.

          1. Basically, I got told that the current level of U.S. Gov’t debt isn’t anything out of the ordinary, my thoughts that inflation was around the corner were short-sighted and wrong, and that default of U.S. Gov’t debt is never going to happen.

            I’d like to shove all of those statements up his ass, sideways, but am a bit perplexed about how to go about it.

            1. Basically, I got told that the current level of U.S. Gov’t debt isn’t anything out of the ordinary,

              Its the highest its been in over 60 years (since WWII). If that’s not out of the ordinary, I don’t know what is.

              Plus, that’s the debt they actually recognize. You start doing some real accounting, looking at unfunded liabilities, and the debt is utterly unprecedented – not 80% of GDP, but multiples of GDP.

              my thoughts that inflation was around the corner were short-sighted and wrong,

              Inflation is here now, in food and energy. “Core inflation” excluding food and energy is a scam intended to understate inflation. The justification for excluding food and energy is that they are just too volatile. But you know what you do with volatile data? You average it, you don’t exclude it. Unless you want to run a scam, of course.
              my thoughts that inflation was around the corner were short-sighted and wrong, and that default of U.S. Gov’t debt is never going to happen.

              default of U.S. Gov’t debt is never going to happen.

              I doubt we’ll actually default, although funny things happen in a crisis. I think what will happen is that we’ll inflate away as much as we can. Which is a slow-motion default, but not a technical default.

              Of course, the geniuses running our books have decided that a low-interest rate environment is the perfect time to shorten up maturities. They are idiots, of course. When rates are low, you want to lock them in with longer maturity debt.

              So even inflating away our debt will have real limits, because when the short-term debt rolls over, it rolls over to a new rate that includes inflation.

              1. Thanks, that was pretty much my understanding of the situation. The links earlier in the thread to DX and PIMCO’s letter have been helpful too. It was gratifying to read this from the PIMCO letter:

                Someone will buy [Treasuries], and we at PIMCO may even be among them. The question really is at what yield and what are the price repercussions if the adjustments are significant…. What I would point out is that Treasury yields are perhaps 150 basis points or 1?% too low when viewed on a historical context and when compared with expected nominal GDP growth of 5%.

                Which was pretty much the argument I was making with the guy—that the negative outlook would lead to higher required bond yields for new debt, which would jack up debt service costs to where they constituted a much larger chunk of expenditures.

                I was arguing with someone from the U.K Commonwealth, FWIW, so their standards of acceptable debt and inflation might differ from mine.

              2. Forget where I saw it, but someone made a rough calculation that it would take a permanent 80% across-the-board hike in the federal income tax to pay down all the outstanding federal debt, both on- and off- balance sheet (For our progressive friends: “the rich” would bear most of that burden).

                Since that’s politically impossible, inflation must be part of the solution. But most of the off-balance-sheet debt (Medicare & SS) is effectively indexed to inflation, so curtailment of those benefits is also inevitable. Hence Obamacare, which provides political cover for future rationing of Medicare (“see, everyone else gets the same crappy deal too”).

                To sum up:
                1. high taxes
                2. inflation
                3. rationing, & probably price controls, & not just healthcare

                I’ve been wary of doom-sayers for most of my adult life, but this is going to be either bad, or very bad. I don’t see how it can be any other way.

              3. Who is excluding food and energy when (allegedly) calculating inflation? The Fed?

            2. http://cdn4.creditwritedowns.c…..to-gdp.png

              Total American debt as a percentage of GDP: personal, corporate, and government. Government debt-to-GDP ratio is higher than at any other time since the end of WW2. Government debt is understated because it doesn’t include obligations to GSEs. It also doesn’t include the runaway costs for Medicare/Medicaid. Your friend is a moron; we’re in deep shit.

              1. Thanks for the graph. This sort of thing is exactly what I was looking for.

            3. Also, no, default in the US will never happen. We control our currency, which means we would probably inflate rather than default. After all, even in Europe’s case where they don’t control their currencies, they pass along service cuts and tax increases before telling bondholders to take a hike. For the US, it wouldn’t be any different.

          2. US debt/GDP (the area between green and red is net debt):
            http://www.usgovernmentspendin…..bt_100.png

            So yes, these debt levels have a bit of precedent. What’s more important are the spending commitments, which will cause that ratio to balloon without entitlement cuts or large tax increases. Those are the unfunded liabilities people talk about. Further, the capacity for growth is lower currently.

            Are we in an inflationary period now, or are we not, or is it that we would be with the increase in M0.

            Well, we are moderately inflationary right now. Contra RC’s statement, food prices haven’t been affected much, although there is inflation in oil prices. What prevents an increase in M0 from being inflationary is low money velocity. Previously, banks and the shadow banking system were lending out money rapidly and holding low reserve ratios, but the opposite is true now. Without the Fed’s actions, the last two years or so would have been deflationary (whether that’s a bad thing depends on your perspective).

            I thought that a lot of the rise in commodities was due to the increase in M0.

            Really, increases in commodity prices depend on a bunch of factors, but to the extent that inflation plays a part, it’s expected inflation. Currently those expectations are pretty subdued, although risk does have an impact for commodities like gold.

            IMO, increased demand as places like China and India will have a larger impact than US dollar inflation. Keep in mind, too, that places like Europe are following more restrictive central banking policies than the US.

            If the U.S. Gov’t wanted to pay down debt, would it be able to in the current economic climate without instituting some Argentine austerity type solution or official devaluing of the currency?

            Yes, the Fed can monetize the debt to some extent, and has. Doing so will inflate the currency, which means less real wealth for those with exposure to inflation. The Fed prints money, buys debt. The market now has a larger quantity of money, which means $1 is worth less. If inflation becomes an issue, of course, the Fed would have to reverse course. Arguably, there’s little difference between this and taxation if you consider real (inflation-adjusted) wealth, which means there’s only a superficial difference between that strategy and a large tax hike.

            1. Thanks for the very thorough answers.

              Re: food prices, I had thought, along with R.C., that food had risen dramatically. The guy I buy coffee from, bitches incessantly about the rise in prices over this last year. See, e.g., http://www.indexmundi.com/comm…..&months=60 Or. http://www.indexmundi.com/comm…..&months=36 for a food and beverage index.

              What prevents an increase in M0 from being inflationary is low money velocity. Previously, banks and the shadow banking system were lending out money rapidly and holding low reserve ratios, but the opposite is true now. Without the Fed’s actions, the last two years or so would have been deflationary (whether that’s a bad thing depends on your perspective).

              The guy I’m arguing with, harped on your last. The idea that government/central bank interference with markets merely makes things worse, fell on deaf ears. Further, haven’t the required reserve regulations been modified lately, allowing banks to lower the reserve requirements? Thought it came through a change in GAAS, allowing certain class of assets to again be counted as capital reserves at full value, increasing the banks’ reserve amounts. If this is the case, I would think this would increase monetary velocity too.

              Isn’t the increased demand in China and India you cite largely a product of U.S. demand: due to the lack of a significant consuming middle class in either country, their increased demand is strongly related to satisfying U.S. consumer demand for Indian/Chinese goods and services? Consequently, if the U.S. continues its recession, increases in Chinese/Indian demand will be small, therefore the driver of increased commodities must be something else?

              And relating to monetizing the debt, I recall you or Dean, maybe robc, a few years ago—pre-Obama, IOW—predicting here that this was exactly how the U.S. Gov’t was going to meet its future entitlement obligations. Something about a 12-15% increase in M0 for 6-8 years, but no official devaluation, and no official scrapping of entire entitlements. My google-fu is weak, otherwise I’d just cite to it, but it did make an impression.

              Thanks again to everyone for the help.

              1. The guy I buy coffee from, bitches incessantly about the rise in prices over this last year.

                Right, certain commodities have gone through the roof. Still, much of the cost of food is in things like machinery and transportation. Also, food is something like 5% of the average US household budget (lowest in the world). That is, imagine the cost of coffee as also including the espresso machine, the stirrer straw, the brick & mortar overhead, the transportation, etc., because those factor into OECD food prices more than poorer countries. Also, your supplier may be unable to pass on all of the cost to you. I’m not dismissing that some foods are much more expensive, just that food price inflation is exaggerated.

                The guy I’m arguing with, harped on your last [point about the Fed’s actions preventing deflation].

                Right, and at the same time he says that the Fed can erase debt without devaluation. Natural deflation + Fed-induced inflation = the last 2 years’ non-flation. But the Fed’s policies are still obviously inflationary. Just wanted to point out that hole in the logic when people state that there’s no cost to monetizing the debt.

                Further, haven’t the required reserve regulations been modified lately, allowing banks to lower the reserve requirements?

                Yes, but it’s irrelevant. The supply of high-quality borrowers has fallen off a cliff. Even those who have made payments have nonetheless seen their collateral devalue. Previously, bank reserves were at or near reserve ratios. Now, much of that extra money is just being thrown back into Fed banks where it does nothing.

                Isn’t the increased demand in China and India you cite largely a product of U.S. demand: due to the lack of a significant consuming middle class in either country, their increased demand is strongly related to satisfying U.S. consumer demand for Indian/Chinese goods and services?

                Maybe in the long run. Keep in mind, though, that China’s economy is still growing at 10% and the US economy didn’t shrink that much. I’d say the biggest factor is concern about the indebtness of OECD countries and the capacity for devaluation — which is related to M0 but more to do with expected inflation (which depends on monetary velocity) — which means people are using commodities as reserve currencies or stores of value. I’m not disagreeing about the importance of the monetary base, just saying that it’s more about how concern over how M0 and other variables interact to cause inflation.

                And relating to monetizing the debt, I recall you or Dean, maybe robc, a few years ago—pre-Obama, IOW—predicting here that this was exactly how the U.S. Gov’t was going to meet its future entitlement obligations.

                Probably wasn’t me, FWIW. Honestly, I think Congress would need control of the Fed for that to happen, as the Fed will only do it on its own if we’re in a deflationary environment.

  15. rates are unusually low historically.

    ask yourself, are rates more likely to go up, go down, or stay the same going forward?

    1. But, but, but…this time it’s different.

    2. Honestly, the 30-year Treasury is yielding 4.47%. Japan’s 30-year yields 2.15%. There is still some potential upside for US bonds (i.e. room for yields to fall).

  16. we are heading to a Greece/Portugal type debt crisis.

    But the Germans won’t be there to bail us out.

    1. China won’t be able to either, since it’s probably about to undergo its own housing collapse and economic catastrophe.

  17. More from ‘tarded liberals. Not what I’d call “heroic”:

    http://gawker.com/#!5794346/hero-professor-in-fuck-you-republicans-scandal

      1. “She referred to me as Ellen, not Professor Lewin, which is the correct way for a student to address a faculty member, or indeed, for anyone to refer to an adult with whom they are not acquainted,

        I know that sometimes leftists are accused of living in a bubble, but expecting everyone to assume that any unknown adult they meet is a professor is sort of descending into unsubtle parody.

        1. It would indeed be sort of weird to address everyone you meet on the street as “Professor Lewin.”

    1. If all it takes to be a hero to the left is to tell someone ‘fuck you’, I’m a hero a million times over.

      1. The most amusing bit is her response to a student:

        “She referred to me as Ellen, not Professor Lewin, which is the correct way for a student to address a faculty member, or indeed, for anyone to refer to an adult with whom they are not acquainted,” she wrote.

      2. The Chronicle of Higher Education has a nice piece on this “new anger” performance:

        http://chronicle.com/blogs/inn…..ment/29284

    2. Just to clarify, a conservative group implies that being conservative on a college campus makes them a hated group, and a professor — with a signature designating her as a university representative — responds with hate mail. Good job. The original event name was in slightly bad taste (the content is innocuous to the extreme), but you don’t win by replying with an email in even worse taste. It also makes you an idiot to send out a mass email that’s mere obscenity as a work email.

      And then her follow-up:

      I admit the language was inappropriate, and apologize for any affront to anyone’s delicate sensibilities. I would really appreciate your not sending blanket emails to everyone on campus, especially in these difficult times.

      Anyone else hate it when people can’t just apologize and move on? Say you’re sorry, point out why the email was offensive, and say that you’ll avoid incivility in the future. The Pubs had the opportunity to take the high road but are demanding an apology, so the ball’s back in her court. She whines about her opponents’ “delicate sensibilities.” Someone, someone, take the damn high road.

      Your reference to the Wisconsin protests suggested that they were frivolous attempts to avoid work.

      No, it implies that it was a political action that took advantage of a loophole in teachers’ contractual obligations, which should be obvious to everyone.

      Then, in the email that Ms. Ginty sent complaining about my language, she referred to me as Ellen, not Professor Lewin, which is the correct way for a student to address a faculty member, or indeed, for anyone to refer to an adult with whom they are not acquainted.

      *sigh*

  18. THREADJACK:

    High speed rail opponents are driven by ideology; not facts like pro-rail people are.
    http://www.cnn.com/2011/OPINIO…..tml?hpt=T2

    1. I like how in response to the comment that there high speed rail consistently fails to cover costs, they point out that there is one, and only one, line in the US that probably could.

  19. Interest rates won’t warn you that the crisis is coming eventually; they’ll let you know it’s arrived.

    I’m pretty sure we’ll be aware the crisis has arrived even without knowing the interest rates.

    What I would like to see is a live two-hour prime-time discussion among Geithner, Bernanke, Obama, and Ron Paul, Karl Denninger, and Peter Schiff. Of course, it’ll never happen, because that in itself would precipitate the crisis.

  20. By the time rates rise, then, it will be too late; we’ll be pushed into panic mode, and in need of giant-sized tax hikes or spending cuts very, very quickly.

    The same way your air bag will tell you your car is too close to the tree.

    1. Awesome. I’m stealing this.

      1. Agreed. Top notch analogy.

  21. The Administration is taking advantage of people’s confusion on a couple of points.

    1) Just because market interest rates are the best predictor available doesn’t mean they’re a great predictor.

    2) Even if market interest rates are the best predictor available right now, their predictions change every moment when new information becomes available.

    It’s one thing for the Administration to say that interest rates are telling us that we’re not falling of a cliff right now, so there’s no need to worry about spending–quite another to suggest that because the market rate isn’t falling off a cliff right now, that means we can keep doing what we’re doing indefinitely without falling off a cliff…

    If we keep going the way we’re going right now? We will fall off a cliff–and when we fall, the market interest rate will bludgeon us silly for it.

    1. 1) Just because market interest rates are the best predictor available doesn’t mean they’re a great predictor.

      This, of course, applies only to market interest rates. Not manipulated interest rates, like those now present in the US debt market.

      The current rates are being held down by QE2, which consists of the Fed buying Treasury bonds (mostly, I gather, at the long end). That keeps rates low.

      People think the purpose of QE2 is to provide liquidity to jumpstart the economy. That is, at best, a happy side effect. The purpose of QE2 is two-fold: (1) to fund the government’s current account shortfall by monetizing debt and (2) to depress interest rates, to keep the government’s debt service as cheap as possible.

      1. One more thought: When market manipulation finally fails, the market correction is extremely fast, and often an overreaction.

        That means that when QE finally ends, or just fails to control the rates on Treasuries, those rates are going to shoot up, and probably overshoot by some considerable margin. Rather than rates going up, say, 5% over two years, they will go up, say, 10% over two weeks. Or days. They may fall back from that initial pop, but the initial pop itself will do long-term damage.

        The crisis, in other words, will be made worse by having been postponed.

      2. Actually, most of the buying is in the middle range: 5 to 7 years. I read an explanation as to why, but it went over my head.

        The thing about QE that surprises me is that it doesn’t spook the financial markets. It’s not QE is a giant state secret: it’s completely open, the amounts are publically available, and every borrower knows it’s going on.

        1. The financial markets love all the “free” money they’ve been getting from Uncle Ben the last two and a half years.

          The biggest problem with the markets today is the excessive focus on the short term. They care too much on what’s happening this quarter and not enough on conditions one, two, or five years down the line.

        2. Part of the issue is that when the government monetizes its debt, it also monetizes -all- debt measured in dollars. So some other investments that would otherwise hold their value better than government debt fail to do so.

      3. To be fair to the Ben Bernanke, I don’t think he ever saw that as his mission. He was highjacked by the Keynesians on Capitol Hill.

        Ben went all-in, and if the US consumer keeps pulling back, we’re fucked. It was a bad bet, and so the latest example why nobody should have that power. Still, it took guts.

  22. Saddle Up

  23. Liars! Everything is wonderful! Borrow trillions more!

    1. I’m glad I’m dead. You guys are freakin’ hosed.

  24. Geithner’s forehead is so big I’ll bet he’s got a bigger brain than the rest of us and is therefore more evolved. Right?

  25. No need to mind what your check book ledgers say, when you can come to me.

    In the future, I see….[gazes deeply into crystal ball]….that you cannot afford the future.

    You must pay me for my services now.

  26. The argument is that if investors were actually worried about the long-term U.S. fiscal outlook, they would be expressing that concern by demanding a higher rate of return.

    Or, possibly, they know we couldn’t afford a higher rate of return and that we’d just strategically default if pressed in that fashion.

  27. By the time rates rise, then, it will be too late; we’ll be pushed into panic mode, and in need of giant-sized tax hikes or spending cuts very, very quickly.

    I am actually looking forward to our coming doom.

    Everyone knows this is entirely the fault of the statist left and the statist right.

    Aside from a few dead enders like Tony and Shrike the political advantage from such a crisis will shift to the advantage of libertarians, tea pirates and other small government types.

    1. I wouldn’t bet that way. The worse things get, the more people go crying to government, “Save Us, Save Us!”

      1. That did not happen in November of 2010, and i have not seen one bit of evidence that 2012 would be any different.

        This also happened in 1980 with Reagon’s election.

        and i would argue the same thing happened in 1776.

        I realize that you are using the 1930s (FDR or Hitler take your pick) as your example but the political realities of today are not the political realities of the 1930s.

        Crisis does demand change. The direction of that change is by no means biased leftward….in fact i would argue that it is biased toward the whoever is the opposition and biased against whoever is in authority.

        Today, and I think in November 2012, the authority is the statists and the opposition is the tea party/libertarian/small government types.

        1. I hope you’re right. Your examples make me think that it depends on the severity of the crisis. I do see a leftward bias during those times when folks came to seriously doubt their ability to keep their homes or support their families.

    2. I see great optimism in your spirit.

  28. When even the NYT admits that interest rates aren’t assuring, it means it is past time to address these budget issues.

    http://www.intellectualtakeout…..ional-debt

    http://sunshinereview.org/inde….._2011-2012

  29. Look at the price at which we borrow.

    I don’t think it’s an accident that he didn’t say

    Look at the rate at which we borrow.

    If he had said that, some smart-ass would take it the wrong way and get the right answer.

Please to post comments

Comments are closed.