Matt Yglesias makes an interesting observation while arguing for fiscal retrenchment: The only logical way to believe now is a time for austerity is if you think there is an asset bubble in U.S. Treasuries and "ignore the price signals and the markets and substitute instead the judgment of expert economic planners that there’s too much debt out there."
It's a topsy-turvy world when the deficit hawks tell you to ignore the markets and liberals tell you to pay attention to the interest rates. While I think Matt underestimates -- slightly -- the ability of the American political system to solve our debt problem, what's more important is that he accurately identifies the flight-to-value phenomenon that makes our Treasury Bonds so dependable -- a collective belief that they are the safest investment on the market. However, he says, "It’s safe until the bubble pops and the animal spirits become seized with panic and everything goes to shit."
That seems unlikely to me so long as the U.S. is the world's largest economy, maintains the world's reserve currency and, not coincidentally, is a military superpower as well. When those things aren't true -- when another variety of sovereign debt can compete in terms of fundamentals and meet international demand for bonds -- that's when we'll really have to worry. That time is not here, or even close. But that's not a state that's will persist forever, so the policy options Matt recommends are worth adopting. No one, however, should have the impression that a 2008-style bubble pop-o-rama is around the corner for U.S. debt.
-- Tim Fernholz
