I’ve enjoyed the couple year-end reviews I’ve seen where political pundits look back at their own predictions and figure out what they got wrong. I only wish that economists would do the same.
One of the standard opinions from many economists, especially those on the right, was that the US spending/debt load was unsustainable and would surely spark massive inflation. After the downgrade of US debt by Standard and Poor’s after the debt limit deal, debt was seen as toxic. America just had to deal with its debt problem or the bond market would deal with it for them.
This dog simply has not barked. In fact, US Treasuries showed a higher demand in 2011 than at any time in the past sixteen years.
The U.S. government received record demand for its bonds in 2011, pushing longer-maturity Treasuries to their best performance since 1995 in a sign that President Barack Obama may have little difficulty financing a fourth consecutive year of $1 trillion budget deficits.
The Treasury Department attracted $3.04 for each dollar of the $2.135 trillion in notes and bonds sold, the most since the government began releasing the data in 1992 during the George H. W. Bush administration. The U.S. drew an all-time high bid-to- cover ratio of 9.07 for $30 billion of four-week bills it auctioned on Dec. 20 even though they pay zero percent interest.
This is a classic example of a flight to safety, and it has as much to do with the poor performance of economies around the world as anything else. Investors, spooked by the troubles in Europe and elsewhere, are in real terms paying the United States to hold its money. We cannot satisfy all the demand clamoring for US debt.
(UPDATE: And as Paul Krugman points out, this is true for pretty much every country with its own currency these days.)
Maybe the markets are trying to tell us something. Perhaps they want the US to borrow more and use the money for a deficit-spending binge to strengthen the economy. I’d say the negative real borrowing rates are a tell in that direction. That money could purchase a complete remaking of US infrastructure, in ways beneficial to the country’s economy and productivity, without a red cent of borrowing costs.
And about those inflation hawks, the ones who claim that the US will turn into Zimbabwe if it keeps borrowing at this level? Another dog not barking.
U.S. inflation is slowing after a surge early in the year.
This is good news for Americans, as it means the money in their pockets goes further. It also is welcome at the Federal Reserve, which has been counting on an inflation slowdown. It gives the Fed some maneuvering room in 2012 if central-bank officials want to take steps to bolster economic growth.
The slowdown has been apparent for months in some commodities. The price of copper is down 21% from a year earlier. Cotton is down 45%. Natural-gas prices continue to fall, and crude oil has retreated from peaks hit in April, though not as sharply as other commodities.
Now, more broadly, the Commerce Department’s measure of consumer prices for November, released Friday, stood 2.5% above year-ago levels in November, down from year-over-year increases of 2.7% in October and 2.9% in September. A less volatile measure excluding food and energy, watched closely by the Fed, rose 1.7% from a year earlier.
Actually, that’s the opposite of good news. It means that the Fed is missing inflation targets. Lower numbers would mean that deflation is creeping back into the picture (the Labor Department’s consumer price index has grown at an 0.8% annual rate over the last quarter). It means that wages are likely stagnant. It means the economy is not running at peak. And most importantly, it means that there’s a ton of headroom for more borrowing to increase overall demand, an opportunity we are tragically wasting.