MAKING SENSE -- November 22, 2011 at 12:32 PM ET
Mainstream Economic Media Cry Wolf
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).
"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.
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.
Okay, but we need a little context. How far has the rate fallen? Let's go to Yahoo! Finance for a chart. There, on the right, is a blue chart of the 10-year rate over the past year. OMG! It's down from 3.5 percent since about April. April. What happened in April?
Okay, maybe April was an anomaly. So click on "5y" under the chart for a view of the rate over the past five years. Can it be? It looks like the 10-year rate is at the lowest point over the entire period! Lower even than in the depths of despair, the post-Lehman crash of late 2008.
One more attempt at context. Go to Bob Shiller's online chart, then open the Excel file to which this links. You'll find a chart of stock prices, in blue, and the 10-year bond rate, in red, reaching back into the nineteenth century. You'll note that today's 1.97 percent is about as low as our interest rate has ever sunk since at least 1880.
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 -- than ours. Investors are also more worried about stock investments. Investors are also more worried about almost any other asset into which they might put their money.
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?
In other words, might the true story plausibly be a complete contradiction of what is regularly reported? That's what Nobel laureate Paul Krugman of the New York Times has regularly argued, but his "opinion" hasn't managed to leak into everyday coverage.
I don't pretend to know if low U.S. interest rates actually reflect fears of near-term budget-tightening. They may simply reflect fears in general. To quote Republican economist Douglas Holtz-Eakin, America may just be the healthiest horse in the glue factory. But I do know that fear-mongering with regard to the bond vigilantes and Greece finds no support in the data. 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.
Photos, from top: wolf at Lakota Wolf Preserve by flicr user RickyNJ and used with a Creative Commons Attribution-NonCommercial-ShareAlike license; Joint Deficit Reduction Committee photo by Mark Wilson/Getty Images; screen shot of Bob Shiller's stock and bond chart; Paul Solman by PBS NewsHour.