I have heard a number of people refer to “the pending fiscal crisis”. I even heard NPR’s Steve Inskeep devote a segment to it this morning on the radio. (I must stress, once again, that NPR’s economic and financial reporting is abysmally, inexcusably bad, to the point where it’s probably a good rule of thumb to assume the truth of the opposite of whatever they say). It is necessary to point out that this sort of talk is nonsense.
A nation is not like a household. When it spends beyond its revenues, it issues bonds that investors hold as safe assets. A crisis occurs when investors doubt that these bonds are any good–when they doubt, in a word, that the state will honor its obligations. Investors’ level of confidence or doubt manifests itself in the going rate of interest on these bonds, set by investors opting to hold or not hold them. If the prevailing interest rate is below the market rate, there is no problem. You see a crisis when the interest rate jumps and keeps jumping (as has been happening in Greece, Ireland, and Spain).
How’s the interest rate on our treasury bills these days?
It should be evident from viewing the chart that rates are at historically low levels, and low even relative to 2010, signaling that investors have vanishingly little anxiety that the government will pay bondholders (rather, their anxiety is finding a decent return elsewhere). The rate shown above is for 30-year bonds, which is higher than the rate on 10-year or 1-year bonds. The rate on 1-year bonds is lower than the rate of inflation, which is to say, in real terms, it’s below zero.
If a business were offered investment with a rate of interest below zero, by numerous reputable private investors, would you ever describe this situation as a “crisis”?
What we have is a political crisis, resulting from institutions that were designed for the 1780s, and a population that has an unusually large number of people who have still not made their peace with the Enlightenment. That crisis is real and urgent. The so-called fiscal crisis is nothing but a sham.