First Britain and now the United States. As we see increasing evidence that governments have borrowed too much, bond markets are starting to rebel against the prospect of more debt. here Bloomberg:
A Bloomberg index shows that liquidity in treasury markets is worse now than in the early days of the pandemic and lockdown, when no one knew what to expect. . . .
What should matter most to the Fed and the Treasury Department is the deterioration of demand in US debt auctions. According to Bloomberg News, the government’s bid-to-cover ratio, a key measure of the government’s offering of $32 billion in benchmark 10-year notes, was about one standard deviation higher than last year’s average. Data compiled by Bloomberg show indirect bidder demand through March 2021, generally seen as a proxy for foreign demand. While the Treasury is in no danger of suffering a “failed auction”, lower demand means the government is paying more to borrow.
All of this comes as Bloomberg News reports that the biggest, most powerful buyers of Treasuries — from Japanese pensions and life insurers to foreign governments and U.S. commercial banks — are all pulling back at the same time. “We need to find new marginal buyers of Treasuries because central banks and banks as a whole are moving to the left,” said Glenn Cappello, who spent more than three decades on Wall Street bond-trading desks and is now a managing director at Mishler Financial. Bloomberg News.
I opposed Germany’s fiscal stimulus at a time when most pundits were demanding Germany do more. Even before Covid I called America’s fiscal policy “reckless”. When Covid hit, our scholars fell over themselves demanding more financial stimulus.
Our public debt is now over 100% of GDP. If you raise the interest cost of that debt from 1% to 4.5%, you’ve added an interest expense equal to the entire military budget. Yes, it doesn’t happen all at once (due to some long-term bonds), but we’re heading in that direction.
Here’s what I said March 2020:
We are now seeing renewed calls for fiscal stimulus. This is a terrible idea. . . .
Instead of blindly throwing money at the problem, we need a smart response to the coronavirus pandemic. It will contain the following elements:
1. An immediate shift to level targeting by the Fed with the Fed’s commitment to purchase whatever it takes (requires any assets) to return to its price level (or NGDP) target quickly after the immediate crisis ends.
2. Strictly targeted financial programs to meet humanitarian needs, such as extending unemployment compensation programs beyond 26 weeks if the coronavirus pandemic lasts beyond 26 weeks. Perhaps weekly payments could also be increased during this crisis, as the “moral hazard problem” is secondary to the immediate future. Additional expenses should be paid for with a higher payroll tax on higher income salaries.
Fiscal policy has been perhaps the most reckless in American history over the past few years, with budget deficits exploding even as unemployment fell to 3.5%. The budget deficit is already over a trillion dollars; We certainly don’t need more deficit spending right now.
We are starting to pay the price for the last 4 years of reckless debt under the Trump/Biden regime. Now do you see why I favor fiscal stimulus over monetary stimulus? And why is NGDP level targeting so important?
Interest rates near zero may seem debt-free, but rates don’t stay near zero forever.
Rest assured. It’s not all covid. here CBO projections from 2019. (The later reality was worse.) Note how the deficit worsened during the peacetime boom of the late 2010s. that never Supposed to happen (Both political parties were largely silent. President Trump backed away from Lease Truss fiscal policy because our debt was so low.)