Sunday, March 28, 2010

Krugmania of the Day: The great "Krugman versus Krugman debt debate" continues. 

Interest rates that the US government has to pay to borrow are rising.

Bloomberg reports that top-rated private business pay less!
Obama Pays More Than Buffett as U.S. Risks AAA Rating

The bond market is saying that it’s safer to lend to Warren Buffett than Barack Obama.

Two-year notes sold by the billionaire’s Berkshire Hathaway Inc. in February yield 3.5 basis points less than Treasuries of similar maturity, according to data compiled by Bloomberg.

Procter & Gamble Co., Johnson & Johnson and Lowe’s Cos. debt also traded at lower yields in recent weeks, a situation former Lehman Brothers Holdings Inc. chief fixed-income strategist Jack Malvey calls an “exceedingly rare” event in the history of the bond market...

"It’s a slap upside the head of the government," said Mitchell Stapley, the chief fixed-income officer in Grand Rapids, Michigan, at Fifth Third Asset Management, which oversees $22 billion...

Investors demand 0.60 percentage point more in yield to own 10-year Treasuries than German bonds of similar maturity, Bloomberg data show. A year ago, debt of Germany, whose deficit is 4.2 percent of its economy, yielded about half a percentage point more than Treasuries...

Moody’s Investors Service predicts the U.S. will spend more on debt service as a percentage of revenue this year than any other top-rated country except the U.K. America will use about 7 percent of taxes for debt payments in 2010 and almost 11 percent in 2013, moving “substantially” closer to losing its AAA rating, Moody’s said last week...

“It’s a manifestation of this avalanche, this growth in U.S. Treasury supply which is under way and continues for the foreseeable future, and the comparative scarcity of high-quality credit,” particularly in shorter-maturity debt, said Malvey, whose Lehman team was ranked No. 1 in fixed-income strategy by Institutional Investor magazine from 1998 through 2007.

Last year’s $2.1 trillion in borrowing by the government exceeded the $1.08 trillion issued by investment-grade companies, the biggest gap ever, Bloomberg data show. Malvey said the last time he can recall that a corporate bond yield traded below Treasuries was when he was head of company debt research at Kidder Peabody & Co. in the mid-1980s...
But Paul Krugman pooh poohs the whole thing...
Yesterday I criticized the WSJ for writing as if a fairly small rise in long-term interest rates spelled doom, doom I tell you, for deficit spending ... maybe I can make the case a bit clearer by comparing the current scary, scary rate rise with something that happened back in 2003. Then as now, the economy was growing, but without yet generating job market improvements.

The rate rise that the WSJ is making so much of is an increase in 10-year rates from 3.67 percent on 3/22 (and 3.61 percent at the beginning of the month) to 3.91 percent on 3/25.

Now compare July 2003: the 10-year rate rose from 3.56 percent at the beginning of the month to 4.49 percent at the end.

Correct me if I’m wrong, but I don’t remember a lot of stories calling that spike in rates a sign of imminent US bankruptcy.
Hmmm, let's try to recall stories about interest rates from 2003.

Hey, this was written then by a "terrified" Paul Krugman!...
... last week I switched to a fixed-rate mortgage. It means higher monthly payments, but I'm terrified about what will happen to interest rates once financial markets wake up to the implications of skyrocketing budget deficits.

A leading economist recently summed up one reason why: "When the government reduces saving by running a budget deficit, the interest rate rises." Yes, that's from a textbook by the chief administration economist, Gregory Mankiw.

But what's really scary, what makes a fixed-rate mortgage seem like such a good idea, is the looming threat to the federal government's solvency... [more].
Well, there's one!