I've been saying the following to friends and colleagues for months now: In all my many years as a business and economics reporter, I have never seen a greater cognitive dissonance than in the current coverage of the U.S. bond market. Even Chicken Little and the Boy Who Cried Wolf would have by now taken early retirement had their warnings proved as lame as those of the MSEM (mainstream economic media).Good question. You'd think more people would ask these market psychics why they have been so wrong for so long.
"S&P Downgrades!" "Bond Vigilantes Poised to Strike!" "America is Greece!" One-liners meant to catch the eye, freeze the heart. But flat-out irresponsible.
What, briefly, is the fear? Very simple. Investors in U.S. debt, aka U.S. bond holders, aka lenders to the U.S. government, are quaking at the prospect of U.S. debt default. The supposed reason: we can't lower our annual deficit or cumulative debt. So the investors will become "vigilantes" and wreak frontier justice the only way they know how: charging us more in interest to continue lending us money by purchasing our bonds.
This is, infamously, what happened to Greece. When it joined the European Monetary Union a decade or so ago, it borrowed money for 10 years at around 3 percent. Today, as those loans come due, its credibility, and thus its credit, is shot. To borrow money for 10 years, the price for Greece is now above 25 percent. The panic of the moment concerns Italy and Spain, however, both of which are indeed experiencing the wrath of the bond vigilantes, their 10-year interest rates flirting with the 7 percent level, at which point the vicious circle is said to start spinning: higher interest rates feeding higher deficits feeding even higher interest rates feeding even higher deficits...
And so now, the simplest of answers to the simplest of questions: how much does the United States have to pay to borrow money for 10 years? On the day the supercommittee throws in the towel? The day the Fitch ratings agency (not the widely discredited S&P) is reported on the verge of a downgrade? The United States will have to pay a king's ransom, right, as the bond vigilantes fasten the noose?
Let's see. Going to bloomberg.com. Clicking on "Markets." Clicking on "Bonds." Clicking on "U.S. Government Bonds." Scrolling down to "10-Year." Here it is: 1.97 percent. Hmmm. The United States has to pay less than two percent to borrow money for 10 years? That's anti-Chicken Little. Not the sky falling, but the interest rate plummeting. Exactly the opposite of all the dire warnings...
Investors also seem pretty sure that U.S. inflation is not going to be a problem anytime soon. If inflation scared them, they'd hardly let the United States lock in an interest rate of less than 2 percent for an entire decade.
So then why isn't it plausible to draw the following conclusion: that U.S. interest rates have been going in the "wrong" direction because investors are scared that the U.S. is going to reduce its debt and deficits, and such a reduction might horse-collar the world economy?