5 ms·
Actually, people trust the dollar so much that the yield on a 10 year treasury bond has been below 2% for quite some, historic lows. Bonds that aren't inflation
by douglasisshiny 14y ago
Actually, people trust the dollar so much that the yield on a 10 year treasury bond has been below 2% for quite some, historic lows. Bonds that aren't inflation protected actually lose money (i.e., bond bought for $1000, worth $950 10 years later); people are paying us to hold their money.
And you'll note that Japan has had a much, much higher debt-to-GDP ratio for quite some time, but has had sluggish growth throughout. The U.S. debt-to-GDP ratio was higher during WWII.
The main reason for this reply is that we shouldn't be cutting spending right now. Governments should be running deficits during recessions. For proof of how poorly cutting your way to growth works, take a look at most of the countries in the E.U. (and no, we are not on our way to Greece. It's a horrible analogy. Greece was on the Euro, not their own currency. Their goods, therefore, are not competitive. So rather than external devaluation, a weak currency, high inflation, they're having internal devaluation, people have to accept lower living standards).
Interestingly enough, the largest area of long-term debt growth is health care costs (medicare and medicaid). The Bush tax cuts are number 3 or 4. The ACA takes some initial steps in order to slow the growth of Medicare and Medicaid. The Ryan plan does, too, but by moving the cost to the elderly.
- euroclydon 14y agoI disagree. Treasury yields are not that low because of trust, but rather because the world is awash with money, and the owners of that money are desperate to park it in a liquid format, of which there are few options on the scale needed.
- mej10 14y agoCitations? I am familiar with the parent's argument, but haven't heard this one before.
- euroclydon 14y agoI think from a simple standpoint, no citations are needed: Fact #1) The U.S. borrows a bunch-o-money, therefore there exists a bunch of money available to lend. Fact #2) Owners of that money would prefer a higher yield, but there does not exist enough alternative assets to put such a hugh amount of money, e.g. look at gold and oil price curves. Real estate is an option for some but it's messy and illiquid. Fact #3) There currently exists no viable plan for the U.S. to reduce their unfunded liabilities, so what exactly are the owners of this money putting their trust in?
- JumpCrisscross 14y agoSafe assets are the most desirable, and in many cases the only permissible, collateral. Given increased collateral demand for financial institutions for reserves, margin, and collateralised borrowing and the potentially shrinking pool of non-Treasury "safe assets" not already on central banks' balance sheets the "price" (yield) of (on) safe assets would be expected to degrade swiftly without regard to concerns about the "safe" asset's quality. http://www.imf.org/external/pubs/ft/wp/2012/wp1295.pdf http://www.imf.org/external/pubs/ft/wp/2012/wp1295.pdf (Money and Collateral) http://www.imf.org/external/pubs/ft/wp/2012/wp12246.pdf http://www.imf.org/external/pubs/ft/wp/2012/wp12246.pdf (Dynamics of Global Liquidity)
- douglasisshiny 14y agoI actually meant to include this in the original comment. I disagree with you in this respect. Investors do have a lot of money, and they do need vehicles in which to invest their money. But when equities are not attractive, they go for safer bets: treasury bonds. So in essence, it is an issue of trust. Investors would rather place their money in equities as opposed to trusts because the yield is so low, but they fear placing money in equities. I'm not sure I understand your argument about the scarcity of liquid instruments. The number of available equities and money market instruments hasn't shrunk. And there are bonds available from other currencies.
- euroclydon 14y agoI still don't think it's trust. It's desperation. Equities aren't really in the same class as government bonds. But the holders of all this cash (I won't even call them investors, but rather folks left holding the bag after a gigantic monetary expansion) can't look to equities for a better rate, because in order for any instrument to provide a reliably high yield, the money supply would have to grow even faster, and it's already grown too fast.
- deleted 14y ago[deleted]