Fools, You Said?

Fly the Derpy Skies from ( OCT 21 9:13 AM ) by Paul Krugman

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Truly, we live in a world in which people feel entitled not just to their own opinions but their own facts.

Mainstream Economic Media Cry Wolf || Paul Solman

Paul Solman:

“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...

There is, therefore, a simple way to see if bond investors are losing faith in a country's credit. Look at the interest rates. It's not like they're hard to find. Bloomberg updates them minute-to-minute. On your cellphone. At no cost.

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Okay, but we need a little context. How far has the rate fallen?

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And, checking with NYU's celebrated economic historian Richard Sylla, we find that today's rates are astonishingly close to the lowest in the entire history of the United States: 1.85 percent, the nadir reached in late 1941. That was the record, I should say -- until September 22, when the 10-year U.S. interest rate plunged briefly to 1.695 percent.


So what's going on? Well, rather obviously, investors are a lot more worried about the credit of Greece -- or Spain or Italy …

Yes, in the long run, America will have to modify its promises to retirees or lenders -- with some combination of inflation, benefit changes and, you would think, raised taxes on the wealthy, if not on everyone. But remember John Maynard Keynes' most famous quote: In the long run, we're all dead.

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