Wednesday, March 10, 2010


For example, I asked about a topic that is on many peoples' minds right now: sovereign debt problems. The near-term deficit is basically not a problem; amortized over 15 or 20 years, the U.S. economy can afford this level of debt. But the long term deficit is a big problem, and I asked one of our "senior treasury officials" whether he was worried that we would cross some threshold where either the debt becomes a major drag on growth, or markets start demanding significantly higher yields to lend us money.

His answer was smart, if not totally reassuring. Ultimately, this is not about some numeric figure, like Ken Rogoff's 80% of GDP; it's about what the market believes. If the market believes that we are going to get our budget in order (at least sort of), then the deficits we're running over the next five or ten years can be sustained. If the market questions this, then we're in big trouble. The reason U.S. debt is the "risk free" rate is that in the past, we've always gotten it together in the end. - Megan McArdle
Not only have we gotten it together in the end, the market has perceived that we've gotten it together before we actually did. And even then the principal of our debt hasn't actually been repaid for a long long time. It's just gotten relatively smaller as the economy has gotten larger. In the end, creditworthiness is essentially a matter of perception. At one level this is kind of obvious but it has important consequences.

Among other things, it is being put in jeopardy by the current health care bill. If in spite of all the turmoil in public finance, we intend to add to the problem instead of attempting to address it, we are less trustworthy, financially speaking than we were before.

At the individual level, this is also related to my signalling argument for voting Republican. It's not circulated very much, but it's quite persuasive for me at least. I wish the party pushed it more than it has.

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