Just to unpack Krugman’s snark (“The Invisible Bond Vigilantes Continue Their Invisible Attack”), the primary fear of budget deficit worriers is that the bond markets will turn on the United States as they start to worry about them defaulting on debts, raising government borrowing rates and weakening economic growth. But right now, the market is buying US long-term debt in such high numbers that they’ve reduced the yield to a mere 3%.
If anything this is a resource right now. If the government has access to ridiculously low-cost borrowing, and private investment and exports aren’t bringing the kind of recovery that would create hundreds of thousands of jobs, they have an imperative to use that fortuitous circumstance to spend more at the public level and raise aggregate demand. To pass up this opportunity is almost criminal. State budgets are pathetically weak, hundreds of thousands of employees at the state and local level could be put out onto the street, and that unconscionably high 9.7% unemployment shows no signs of dissipating. And the only reason for the deficit hawks to stop government action – the fear of the bond markets – is a complete phantom.
Right now, if policymakers want to worry about an entity getting crushed by the bond markets, they should worry about BP. The US government is fine, or at least it would be if it could properly stimulate the economy and bring the nation back to economic recovery. Failing to capitalize on locking in some great long-term debt rates because of mythical fears makes no policy sense, and in the real world it unnecessarily damns a significant amount of the population to a life of hardship.
On a related issue, Dean Baker has more on the America Speaks meetings and the exaggerations prevalent in their workbook materials.
UPDATE: A smart take via Tom Petruno of the LA Times:
The more the industrialized nations talk about reducing spending, the greater the risk that the global economy tilts back toward recession and deflation. At least, that’s how new bond buyers see it, said Tom Di Galoma, head of U.S. rates trading at Guggenheim Partners in New York.
“This is carryover from the ‘double-dip,’ deflation outlook” that fueled heavy buying of Treasuries last week, Di Galoma said. The 10-year T-note yield was 3.24% a week ago.
That’s the fear, not deficits.