Which brings me to the awful contribution this week (December 19, 2011) by the Washington Post’s Robert Samuelson –
Bye-bye, Keynes?. This article is about how Robert J. Samuelson cannot identify an elephant from any angle.
He thinks it is a serious question to ask why bond yields are low in the US and are rising in Italy and Spain, Greece, Portugal and Ireland. He seems to bemused about how deep that question is – challenging us with its profoundness.
A rude response would be to “get a life”.
A more reasoned response is to suggest that there is an elephant present that he seems to have avoided seeing as it crowds out all available space in the room he is typing from.
He says that “Greece, Portugal and Ireland have already reached” the tipping point of too much debt and “(h)eavily indebted Italy and Spain could lose access to bond markets” and then – in a Hallelujah moment he says:
Thankfully, the United States is not now in this position. Interest rates on 10-year Treasury bonds hover around 2 percent; investors seem willing to lend against massive U.S. deficits. Just why is unclear. It’s not that U.S. budget discipline is noticeably superior.
A whole raft of financial statistics (debt ratios, deficit to GDP ratios) follow to show how “bad” the US is relative to the EMU nations and he thinks for the US that “piling up more debt, it would still risk aggravating a larger crisis later”.
Just why Robert J. Samuelson writes this is “unclear”.
He thinks it has something to do with his claim that “(p)reviously gullible investors will wake up one morning and conclude that the situation is beyond salvation”. He claims that “(i)f history is any guide, this scenario will develop not gradually but abruptly”.
Which history is he talking about? US bond yield history? Upon what basis are these investors gullible?
The reality is that the bond investors know exactly what they are getting themselves in for. They know that US bonds are zero risk and that is why the tenders are always oversubscribed at very low rates. There hasn’t been a time in US history (since we have data) where the bond markets have concluded “the situation is beyond salvation”.
That is sheer fantasy – ignorant and uninformed.
Yields are low and bond auctions over-subscribed because the bond markets know the US government is fully sovereign in its own currency as are Japan, UK, Australia and just about everywhere else.
Bond markets also know that the central banks in these nations can easily control all yields if they wish and totally deal them out of the equation.