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.
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.
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Not to put too fine a point on it, but by the time interest rates start going up, it will be too late.
And of course the official line at that time will be: "Nobody saw this coming!"
I did.
Me too.
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
or 9. All the above
They tried that with the last one....and the tea party ended up taking the House.
You forgot AGW.
Racism...? Homophobia?
Uncomfortable footwear?
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/
Hey Brophy, we already have a 'libertarian' blog whore here and his name is Greg Smith.
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.
Timmy is just the patsy...apparently too dull to know it!
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.
I always loved Harry Browne on this:
"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.
Investors are "demanding" low interest rates?
Uh no.
The Fed is deliberatly depressing interest rates.
That was one of the stupidest thing I've heard in a while. "We want less money!" Timmeh is a monkey in a suit.
"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.
Here's a heaping helping of DOOM! http://market-ticker.org/akcs-www?post=184644
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.
Actually, PIMCO did more than that: it's short Treasuries (link is ZH, so just ignore the hyperbolic parts).
Sure, Bill Gross has made billions of dollars for his clients, but look at me, I have a Nobel Prize!
Don't worry, be happy!
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.
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
Fivehead Geither
I like that....I've been calling him "Eraserhead Geither" but Fivehead is better!
I'm partial to Turbo-Tax Timmy.
I like that "that asshole suit from Billy Madison", but whatever works for you.
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