Megan McArdle on "The Risk of Debt":
So why should we worry about the ability of the government to borrow? For the past decade, at least, the American government has been able to borrow pretty much all the money it wanted without seeming to pay much of a price in terms of higher interest rates. Bush's deficits were worrying in a number of ways, but they certainly didn't crowd out private investments, and we got a good deal on the money.
Bush's deficits didn't crowd out private investments? I'm not so sure. Investment was down in 2001-2008 relative to the 1990s. And what investment there was was concentrated in housing, a sector that (a) is politically favored, and (b) where the investors are ordinary people who might be less savvy to the changing future than businessmen are. I'd bet that Bush's deficits did crowd out private spending. Not that we'll ever exactly know. McArdle continues:
But Obama's spending plans are extraordinarily ambitious. His projected deficits for the rest of his possibly presidency are higher than the "runaway" deficits that plagued most of the Bush administration--and after the first few years, that's not stimulus, that's ordinary spending outstripping revenue. For a while now, I've been asking people at conferences, on and off the record, what America's sovereign debt risk is? That is, how long until people stop treating treasuries as the "risk free" securities, and start demanding a premium for the risk that we might default.
The answer from the right has been a nervous (perhaps hopeful) 2-3 years. The answer from the left, and professional Democratic wonks, is some unspecified time in the future. Probably, there will be a Republican in charge. Markets hate Republicans.
But last Thursday, the Treasury auction was . . . well, descriptions vary from "weak" to "horrible". This raises the unpleasant possibility that markets are, as my business school professors insisted, "forward looking". Voters may believe that getting a bunch of special interests to agree in principal that costs should be cut is the same thing as actually cutting costs. Bond markets don't. That's why James Carville famously wanted to be reincarnated as the bond markets so he could "intimidate everyone".
In hindsight, it seesm obvious that subprime borrowers were taking out loans they couldn't afford and were headed for disaster. What will Obama's spending plans look like in hindsight?
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