Paying Attention -- T-Bills

This isn’t an investment blog. It isn’t even an economics blog. But I am very interested in the economy because it affects everything.





One of the things Krugman talks about is the rate on 10 year T-bills. He uses it to dispel the notion of the “bond vigilantes”. Here’s the idea:

If the world’s investors lose confidence in the U.S. they will no longer buy our bonds (lend us money) and/or (more likely) charge us more interest to lend us money. It’s really no different than your local bank. If you’re a good credit risk, you pay a low interest rate. If you’re a bad risk -- if you can even get a loan -- you pay a higher interest rate.

The U.S. is the best customer the world’s bankers have. We borrow more and (this is the important part) we have a perfect credit rating. The U.S. pays it bills. Every single time. For 235 years. We get the best interest rate there is -- currently about 3%. (For a quick education about how low that is go here and check the dates.)

That is the one good thing we have going for us in The Great Recession. We can borrow money cheaply. Until the Republicans mess it up that is. Krugman has been dispelling the myth of the bond vigilantes for years now. The Republicans keep saying that the investors are going to turn on us. We’re borrowing too much. When the bond vigilantes turn us it will be ugly because instead of paying 3% interest we will be paying 6%. Or 10%. Anybody that has ever had a mortgage rate change on them or the interest rate on a credit go up knows how painful this can be. It sounds like a sound theory. Except it never happened.

The White House Believes in the Confidence Fairy

”Obama has operated under severe political constraints, and those of us who criticize the inadequacy of the stimulus and other policies have to be mindful of that. But the White House did not have to concede the economic argument the way it has — especially when the confidence-fairy, invisible-bond-vigilante believers have been proved utterly wrong. I mean, how could you have a clearer test of liquidity preference versus loanable funds than having the US government borrow almost $3 trillion with zero, absolutely no, effect on interest rates?”

That’s right. We -- the United States of America -- borrowed $3 trillion dollars and the interest rates didn’t budge. If anything, they actually dropped (by a very small amount.) (Small amounts on interest matter when factored into a number with 12 zeros behind it.) So the screaming from the Republicans about rising interest rates has been thoroughly debunked by the facts.

And in typical Republican fashion, if the bad thing didn’t happen on it’s own, they’ll make it happen. Enter the debt ceiling debate. What could screw up our credit rating and increase our borrowing costs? That’s right. If we default on our loans we’ll get charged more interest for loans. If the truth be told, we might not even have to default. Just the idea that we might default could spook The Market.

But it will be an interesting exercise to see if I understand all this. So, for the next few days, I’ll be keeping my eye on the 10 year T-bills.

If you’d like a less complicated and more political explanation of all this, I’d recommend watching Rachel.

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Don Brown
July 22, 2011