U.S. Treasury yields just plunged, as part of a flight to safety. This is because of Japan and perhaps because of the situation in Bahrain also.
Quick quiz: does this mean our federal government should:
a) spend more money, because there are even fewer bond market vigilantes than before, or
b) spend less money, because there is a general signal that everyone should pull back on excess commitments and risky projects, governments included.
Sadly, we are allowed only one guess at this problem.
The extra credit question is a) vs. b) when the lower yields are instead caused by a global financial crisis.
It's hard to argue that we should become more willing to borrow because Japan had an earthquake that will cut into global GDP. Yet functionally, this is the argument that people are making, when they say that our current deficits must be okay because the markets are willing to lend us the money at cheap prices. All the developed countries (i.e., the ones that can be relied upon to have the will and the means to attempt full repayment of their debts) have huge, glaring economic problems; ours are probably the least bad. But that doesn't mean that we can't and won't have a fiscal crisis if we borrow too much.
And the bad signals aren't just to the federal debt market--the flight to quality is ultimately going to push things like mortgage rates down too. Would the people urging the government to take on as much debt as possible also urge our homeowners to once again leverage themselves as far as the banks will allow?
Update (12:25 pm) Reader abUWS has perhaps the best, most succinct metaphor I've ever seen for this argument:"When the Titanic was sinking everyone eventually rushed to the stern of the ship. That didn't mean that that part of the ship was actually safe."
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