There Will Be Debt

In Jan. of 2011 the POTUS announced 400B in budget cuts over 10 years through a variety of cuts and freezes. On Dec. 23 the debt cap was hit again and a 1T automatic adjustment was triggered.







This is a graph of 10 year Treasury yields from 1880. Clearly the huge amount of debt has led to an incredible rise in rates. WAIT? WHAT? The truth is that outside of the 70's (which started in the 60's) rates were common in the low single digits. Even the Fed Funds rate routinely traded sub-50 bp and no one called it "extraordinary" accommodation. The 70's experience has distorted 2 generation's views on rates. The Bond, back from brief extinction, is worshiped and hoarded. The government is doing its best to accommodate the love-fest. Nothing to see here, move along.

2 thoughts on “There Will Be Debt

  1. Ivan

    “Nothing to see here . . .” Yup, that’s the problem. Bonds reflect the unfortunate reality that US productive capacity is underutilized. While the Fed can shout and twist the bonds until they sing the Ben’s song, the fact is bonds are still getting auctioned to 3rd parties who are not coerced to buy them.

    We still need to get aggregate demand much closer to capacity. My fear is that all the deficit hawks/ austerity mongers will force that to happen by shrinking capacity. This is a death knell for recovery and employment. We are still feeling the effects of deleveraging in the private sector. We have the ability to borrow cheaply and invest in infrastructure. Load the boat. The Fed can sop up excess liquidity when the time comes. Otherwise there will really be nothing to see here.

  2. lwmaus

    I hate to bring up the dreaded ‘I’ word, but shouldn’t interest rates kinda adjust to give the buyer of the debt a ‘real rate of return’ (ror) ? The question imho, is what should the real ror be and what is the real rate of inflation ? Since we seem to be living in a state of ‘unrealness’, only god knows and maybe the bernank. Everyone else is left with their Claxton $5/pound fruitcakes that used to be $1/lb. Good eatin ! .. 🙂


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