If There's a Debt Crisis, Why Is Government Debt Golden?


Government debt to GDP is above 100 percent. Even the most austere and devastatingly bare-bones budget plan will not eliminate the deficit until First Contact with the Vulcans. Yet federal government debt is selling at what may be the lowest interest rate in American history.

This is good because it infuriates Paul Krugman, but it's a mystery that budget hawks need to think about:

Why is more U.S government debt a bad thing, when people all over the world are willing to buy it for a measly 1.63 percent? 

That's today's yield on the benchmark 10-year Treasury note, and it's the lowest it's ever been, breaking a record held since February 1946.

In The Wall Street Journal, Cynthia Lin says fear over the European debt crisis is the camel's nose under the tent that broke the camel's back by stepping on a crack that drew the shortest straw, or words to that effect. 

"Concerns earlier this month about Greece's future in the euro zone spurred a flight into safe-haven Treasurys that got yields near, but never through, record-low levels," Lin writes. "Fears about Spain's ability to support its banking system seems to be the straw that broke the camel's back."

In the HuffPost, Mark Gongloff says nannynannybooboo to the sputterings of smartyboots deficit hawks: 

But but but, some will sputter, America is eyeballs-deep in debt that it can never repay. Shouldn't interest rates be moving in the other direction? You know, higher? After all, people who don't pay their debts see their own interest rates skyrocket.

Here's the thing, though: Just about every other credit in the world is in even worse shape than the credit in the U.S. Among major developed sovereign borrowers, only Germany pays less to borrow than the U.S.—about 1.27 percent for 10 years, at last check… 

In the meantime, the U.S. government will just keep borrowing money hand over fist at super low rates, thanks very much, defying the warnings repeated year after year that inflation and interest rates are going to explode any minute now. In fact, some could even ask why, with rates this low, the government hasn't been borrowing more to help stimulate the economy.

The short answer to that last question is that in the wide world outside the closed system of the Keynesians, government spending does not in fact stimulate the economy. But why isn't it costing more for a hopelessly indebted govenment to borrow money? 

The greenback is not gold everywhere. Two economic backwaters called China and Japan have decided to cut the dollar out of their own currency trades. From International Business Times

The yen-yuan direct trade development is expected to boost commerce and investment between the two economies. It will carry benefits for both.

The move will mark a major step in China's efforts to further internationalize the yuan and gain international recognition for its financial system. In past years, China has carried out numerous currency swaps with other countries, often worth tens of billions of dollars, but those were largely seen as symbolic gestures. Direct yen-yuan trading will mark the first time China has allowed another currency to trade directly with the yuan besides the U.S. dollar.

Back in 2010, while writing about how Bernankeism had become the default economics of every major central bank, I turned the high debt/low interest rate riddle into a zen koan: 

If every currency collapsed at the same time, would that be a push?

That was a simpler time, when you could still explain a successful Treasury auction by claiming the Federal Reserve Bank was acting as a "mystery buyer" for Treasury bonds.

But across-the-board currency devaluation still seems to be the answer. Gongloff says as much in his comments about the sorry state of other countries' credits. Seeking Alpha suggests the same thing, speculating that investors are betting the dollar will win the tallest-midget contest by becoming the last currency to fall. When that day comes, you will be told that inflation is under control, and it will be your patriotic duty to believe it.