{"id":350108,"date":"2010-02-22T09:00:55","date_gmt":"2010-02-22T14:00:55","guid":{"rendered":"tag:business.theatlantic.com,2010:\/\/3.36328"},"modified":"2010-02-22T09:23:16","modified_gmt":"2010-02-22T14:23:16","slug":"is-the-bond-market-psychic-or-stupid","status":"publish","type":"post","link":"https:\/\/mereja.media\/index\/350108","title":{"rendered":"Is the Bond Market Psychic or Stupid?"},"content":{"rendered":"

President Obama’s proposed commission to solve the long term debt crisis has been met with disdain across the political spectrum. But some commenters — mostly liberal economists —  think we don’t have a crisis in the first place. After all, they point out, look at the bond market. Short term interest rates are near zero and the 10-year yield is in the mid-3 percents, which is awfully low. The bond market doesn’t see a fiscal crisis, so why prepare for pain?<\/p>\n

Paul Krugman has been making this point for a while. Here he is in August 2009<\/a>: <\/p>\n

Right now GDP is around $14
\ntrillion. If economic growth averages 2.5% a year, which has been the
\nnorm, and inflation is 2% a year, which is the target (and which the
\nbond market seems to believe)<\/b>\n<\/p><\/blockquote>\n

And again in November 2009<\/a>:<\/p>\n

Right now, however, the bond market seems notably unworried by
\ndeficits.<\/b> Long-term interest rates are low; inflation expectations are
\ncontained (too well contained, actually, since higher expected
\ninflation would be helpful). No problem, right?\n<\/p><\/blockquote>\n

Krugman could be absolutely right. But it’s a little against character
\nto watch him put this much trust in a market — a fraught
\nmarket at that, since acute uncertainty surrounding global markets has
\ncreated a flight to safety in US dollars that will turn when the world
\neconomy recovers. But the deeper problem with deficit-defenders
\nthinking the bond markets are so smart is that the administration
\nrunning up the deficit seems to think the bond markets are a little bit
\ndumb<\/a>.
\nSo dumb, in fact, that they can be fooled into a false sense of
\nsecurity by a non-security discretionary spending freeze that was
\nrighteously mocked by … everybody. Here’s<\/a> Noam Scheiber on the administration’s thinking behind the freeze:<\/p>\n

\n

…Given the
\ndifficulty of doing anything about the long-term deficit next year, the
\nadministration needs some signal to U.S. bondholders that it takes the
\ndeficit seriously.<\/b> Just not so seriously that it undercuts the extra
\nstimulus.<\/p>\n

The Orszag approach [writing a budget that’s tough on discretionary spending] just might accomplish that. Given the amount of
\ndomestic discretionary spending in the federal budget–about $700
\nbillion this fiscal year–we’re talking about cuts of, at most, several
\ntens of billions of dollars if Orszag holds the line on spending (and
\nprobably less once Congress weighs in). Which means the cuts wouldn’t
\ncome close to offsetting the likely stimulus. But they just might buy
\nsome credibility in the bond market, which could defer the day when the
\nreal deficit cutting has to start.<\/b>\n<\/p><\/blockquote>\n

This is about more than what the bond markets are saying. It’s about how what they’re saying now should guide policy making.
\nEither the bond market is very wise and should act as a lighthouse for
\nour long-term fiscal plans, or it’s so hilariously gullible that it
\nwill swallow a measure that was mocked by every policy writer with a
\nkeyboard and an internet connection. If bond markets can tell the
\nfuture, they can’t be tricked with gimmicks. If they can be tricked with gimmicks, we shouldn’t
\ntrust them to tell the future. So who is right?


\n

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\n\"\"<\/p>\n","protected":false},"excerpt":{"rendered":"

President Obama’s proposed commission to solve the long term debt crisis has been met with disdain across the political spectrum. But some commenters — mostly liberal economists —  think we don’t have a crisis in the first place. After all, they point out, look at the bond market. Short term interest rates are near zero […]<\/p>\n","protected":false},"author":1534,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[7],"tags":[],"class_list":["post-350108","post","type-post","status-publish","format-standard","hentry","category-news"],"_links":{"self":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts\/350108","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/users\/1534"}],"replies":[{"embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/comments?post=350108"}],"version-history":[{"count":0,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts\/350108\/revisions"}],"wp:attachment":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/media?parent=350108"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/categories?post=350108"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/tags?post=350108"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}