Megan McCardle in the Atlantic is wondering about the bond market too.
The Risk of Debt
12 May 2009 07:55 am
So why should we worry about the ability of the government to borrow? For the past decade, at least, the American government has been able to borrow pretty much all the money it wanted without seeming to pay much of a price in terms of higher interest rates. Bush's deficits were worrying in a number of ways, but they certainly didn't crowd out private investments, and we got a good deal on the money.
But Obama's spending plans are extraordinarily ambitious. His projected deficits for the rest of his possible presidency are higher than the "runaway" deficits that plagued most of the Bush administration--and after the first few years, that's not stimulus, that's ordinary spending outstripping revenue. For a while now, I've been asking people at conferences, on and off the record, what America's sovereign debt risk is? That is, how long until people stop treating treasuries as the "risk free" securities, and start demanding a premium for the risk that we might default.
The answer from the right has been a nervous (perhaps hopeful) 2-3 years. The answer from the left, and professional Democratic wonks, is some unspecified time in the future. Probably, there will be a Republican in charge. Markets hate Republicans.
But last Thursday, the Treasury auction was . . . well, descriptions vary from "weak" to "horrible". This raises the unpleasant possibility that markets are, as my business school professors insisted, "forward looking". Voters may believe that getting a bunch of special interests to agree in principal that costs should be cut is the same thing as actually cutting costs. Bond markets don't. That's why James Carville famously wanted to be reincarnated as the bond markets so he could "intimidate everyone".
But the problems faced by Clinton were modest--moderately higher interest rates, possibly, for ordinary borrowers. The Obama administration is trying to borrow 13% of GDP this year. If bond markets think future deficits are a problem, they can rapidly push up rates to the point where that borrowing becomes unaffordable. And if they do, it will be clear that they are pricing in that ugly, ugly CBO graph:
Obama can assure voters that he inherited these deficits. But bond markets pay closer attention to the fact that Obama has already increased the projected deficit he inherited by 50%:
The White House raised the 2009 budget deficit projection to a staggering $1.8 trillion today. For context, it took President Bush more than seven years to accumulate $1.8 trillion in debt. It also means that 45 cents of every dollar Washington spends this year will be borrowed.
President Obama continues to distance himself from this "inherited" budget deficit. But the day he was inaugurated, the 2009 deficit was forecast at $1.2 trillion -- meaning $600 billion has already been added during his four-month presidency (an amount that, by itself, would exceed all 2001-07 annual budget deficits). And should the president really be allowed to distance himself from the $1.2 trillion "inherited" portion of the deficit, given that as a senator he supported nearly all policies and bailouts that created it?
The president also talks of cutting the deficit in half from this bloated level. But even after the recession ends and the troops return home, he'd still run $1 trillion deficits -- compared to President Bush's $162 billion pre-recession deficit. In other words, the structural budget deficit (which excludes the impacts of booms/recessions) would more than quintuple.
Obama's spending is not the only reason the deficits are so big--not by a long shot. But he is using the sticker shock to slide in big spending plans without paying for them. And while the US can certainly afford one $1.4 trillion year, it probably cannot afford 10 $600+ billion years. As private credit markets recover, government credit markets will start to reflect that reality.
That's not to say that disaster is at hand. Obviously, I am not fond of all the new spending plans, so I (and you) should be mindful of a possible tendency towards wishful thinking. And this is early days--sometimes a bad bond auction is just a bad bond auction. But I imagine that Larry Summers had at least one sleepless night.
A few of the comments I found interesting.
tsotha (Replying to: michaelFOODY) May 12, 2009 8:19 PM
All that money has to come from somewhere. Ultimately cap and trade is a consumption tax, and the people doing the consuming aren't going to appreciate it. I've seen estimates of an additional $4000 cost to the "average" family. Seems a bit high to me, but even 25% of that will cause a political revolution. Now, the people in Congress are overwhelmingly good at one thing, and that is staying in Congress. If I could find a way to bet against cap and trade ever happening in the US I would put my net worth into that bet.
Yancey Ward May 12, 2009 9:40 AM
The window for getting this tide of red ink under control is closing rapidly. The first large wave of Baby Boomer retirements starts hitting in the next five years.
Here is a prediction you can probably take to the bank. The government is going to find it more and more difficult to actually borrow on the open market at rates that don't explode the interest costs to the government, so they will turn to two sources- monetization of debt by the Fed, and forced lending from 401Ks and IRAs.
J Mann May 12, 2009 10:19 AM
One of the big problems with the stimulus bill is that it's mostly tail and very little dog. Alice Rivlin, John McCain and others pushed to divide the early spending into two bills - "stimulus", which would be money spent in the 18 months after passage and designed to start the economy, and "investment", which would be longer term spending.
Instead, Obama pushed the dem wish list, so we got a lot of out-year spending, which contributes to the risk of a US treasury collapse, and very little actual money spent to date.
The best case you can make for the stimulus is that it has (hopefully) had a psychological impact - that because people know that the money eventually will be spent by the government, they are spending their money now. But (1) that's difficult or impossible to test, (2) it's probably not true, and (3) if the point of the stimulus was to create a publicity stunt to encourage people to feel better about the economy, there were better and cheaper ways to accomplish that.
RobM1981 May 12, 2009 11:28 AM
Recent news: Looks as if Obama and the CBO's estimates are off a bit, and the $1.8T 2009 number is sliding closer to $2.0T.
His error, alone, is equivalent to the 2007 deficit - in toto.
Therein lies the issue. These numbers are staggering no matter how you slice them, and there is no way to predict how the world will respond since this is terra incognita. There is one thing that's pretty certain however: the response won't be rosy. Careless spending is rarely rewarded.
Obama and the Congress that he leads clearly have no idea what they are doing to the economy. This is being driven by social engineering, not economics. Nobody is even reading the bills that were passed (it's physically impossible, given the short time windows).
So before the liberals ask "well... what was he SUPPOSED to do?" perhaps they can agree that ramrodding $2T in un-reviewed deficit spending wasn't it.
But that's not how liberals think. They view this as some sort of "we won, you lost" situation, without having the common sense to realize that the inflation that is coming will affect us all - and the poor and unemployed doubly so. They have just cut off their own nose to spite their face, but they aren't even smart enough to realize it.
THAT'S what's so amazing about this. The sheer magnitude of the stupidity and ignorance is breathtaking.
section9 (Replying to: RobM1981) May 12, 2009 3:37 PM
No, when a political party is in Triumphalist "We Won, You Lost, Get the **** In Line" mode, it starts digging its own grave.
Forget comparing today's Democrats to the 2002 Republicans. That's too easy.
Think the Democratic Party right after Lyndon got elected outright in 1964. He absolutely humiliated Goldwater. That election makes Obama's achievement of last November look tame in comparison.
What did the Democrats do? They fell in behind a Protracted Land War in Asia and inflationary social policies at home.
I would cite Marx here, but everyone does that.
The problem is that the Base Democrats spent so many years hating Bush and what he "did to the country" that they now only care that they have the levers of power and that the levers need to be used to affect change. They can't see how this stuff turns on them in the most vicious of fashions. So there doesn't seem to be anyone around to stand up and say, "wait a minute, there are limits to what we can do!"
Besides, when you're being cheerled on by the likes of Andrew Sullivan, everything must seem possible. When everyone adores the Leader, including the Press, that should be when the warning signs start going off in Democrats' heads.
But it won't, because they have the power, and they don't want to lose it.
nyghtrunner (Replying to: Mark) May 13, 2009 5:47 PM
Bush had a $162 bil pre-recession deficit? Maybe with some hopeful White House numbers if you keep the war off the books.
If you look at the '07 deficit, that's actually what it is. Not the ACCUMULATED DEBT, the budget deficit. Those are completely different things. The '07 fiscal year was the last year that we were "pre-recession". So the statement is valid. Can you come up with some numbers that actually support?
Just for reference, the cost of the ENTIRE IRAQ WAR has been estimated to be just under $700 billion (As seen here). Not that I'm a huge fan of that, but that's over 7 years. Obama's stimulus package was finalized at $787 billion (as seen here). (And please spare me the "That's from Fox News!" meme... That's what the final cost of the bill was... it's fact, no matter where it comes from)
Explain to me how the Chinese are going to unwind their dollar assets.
I suppose the idea that they, along with anyone else who has purchased our debt (Saudi Arabia, Russia, Kuwait, etc.) might come over here to lay claim to our land in order to pay for it? You think we could stop that? While we're disarming, and they are re-arming?
Money will keep coming cheap... Until it stops coming? Click
here. Oh, wait, it looks like they've already started to slow the purchase of our debt... So the only "cheap money" option left is to fire up the printing press. And I'll tell you what. When the currency has NOTHING BUT OUR WORD backing it, it will be worth EXACTLY the price of the paper it's printed on.
You seem to think I'm happy about Bush's handling of the economy. I'm not. And if I wasn't happy about that, what makes you think I would be anything other than downright ANGRY about Obama's spending and handling so far?
meganmcardle.theatlantic.com |
