Matthew Lynn writes that a "financial castrophe" is in our future. He claims it's due to the national debt. Lynn's analysis implies that markets are quite stupid. Misunderstanding and non sequitur follow.
Let’s start with Lynn’s headline assertion that “A financial catastrophe is looming.” Except that there’s $39 trillion worth of debt, get it? Lynn does not.
It’s plainly lost on him that as the $39 trillion number attests, U.S. debt is the most owned income stream in the world. Lynn’s catastrophizing implies that he knows something the deepest markets in the world don’t.
Sorry, but that’s just not serious. It’s seemingly lost on Lynn that you could fill ten Wembley Stadiums with all the economists, politicians and pundits who’ve superciliously made the same argument as Lynn has about the national debt. Actual markets, populated by actual people with actual money on the line, have mocked not just Lynn’s certitude, but that of other Cassandras like him for decades.
To which Lynn might respond that, this time is different. He writes that “The price that the U.S. government has to pay to borrow money for 30 years has already punched through 5 percent a year, its highest level since the financial crisis of 2007.” Lynn would perhaps imply in the latter that markets are starting to correct Treasury yields upward to reflect the “catastrophic” future he promises. Hopefully readers can see the flaw in his thin argument.
Yields on Treasuries are the same as they were in 2007. Except that the national debt was roughly $9 trillion in 2007 versus $39 trillion today. Get it? Lynn once again does not.
Amid a quadrupling of what Treasury owes, investors haven’t increased the cost for Treasury to borrow even a bit. Stop and think about that.
Without presuming to divine the “message” or “messages” in a market this deep, it’s easy to deduce what the market is not saying: that a catastrophe awaits.
It’s also easy to deduce what’s implied in a mirroring of Treasury yields despite a quadrupling of the debt. It’s a tell from the marketplace that lenders with actual skin in the game expect tax revenues flowing into Treasury to soar in the coming decades. Seriously, how else to explain yields the same as those in 2007?
Ergo, the message from the market is that we have a soaring revenue problem now and in the future, with the debt a symptom of it. This is important in consideration of Lynn’s alleged fix.
He wants to resume calls for “deficit reduction,” which is Lynn’s unwitting pivot to non sequitur. It’s plainly lost on him, as it is lost on the alarmists from the warring economic religions across the political spectrum, that spending cuts and entitlement reform will do less than nothing to reduce the debt that has the various religionists so persistently predicting crisis. See Treasury yields again if you’re confused.
What they’re explicitly signaling among other things is a term well known to investors who must put actual money behind their predictions: “coverage ratios.” As incomings grow, capacity for debt grows. Treasury debt has grown because expectations about future U.S. tax collections have grown, and with the latter the U.S.’s capacity to borrow.
With Lynn it’s not just that he implies stupid markets, it’s that he doesn’t know why Treasury markets continue to mock his certitude. We once again have a too much tax revenue problem that is paradoxically revealed through rising debt. Given the certain horrors of government spending whether enabled by taxation or borrowing, the real crisis is that there is no debt crisis. Coverage ratios Mr. Lynn, coverage ratios.
