Politics, Moderate



Republicans' fiscal flip-flop is breathtakingly ill-timed

Catherine Rampell on

As we learned from John Maynard Keynes, deficit spending should be countercyclical. When economic growth goes down, deficits should go up, and vice versa. The idea is that the government can pick up the slack when private demand lags (as was the case back in 2009).

For most of the past 70 years, we've basically followed this guidance. Deficits have closely tracked the unemployment rate, with exceptions during wartime. It's only quite recently -- beginning in the last few years of the Obama administration -- that the two trends decoupled, as an analysis from Goldman Sachs Economic Research documented last month.

We're now in one of the longest economic recoveries on record. With unemployment at 4.1 percent, we don't need more deficit spending to stimulate the economy. Yet here we are.

Ramping up deficits today means we'll have less room to maneuver when we actually need it -- i.e., when (not if) we fall into recession again.

The second reason the timing is poor is a bit more complicated and possibly scarier: Just as we're asking the world to buy more U.S. debt, fewer people may be interested in doing so.

The supply of U.S. Treasurys for sale is going way up this year, and not only because of Congress. The Federal Reserve is also unwinding the swollen balance sheet it built up during the crisis. In addition to that $1 trillion of newly issued Treasurys to finance the budget deficit, the Fed will dump about $230 billion in existing Treasurys onto the market this year, according to an estimate from Evercore ISI.

Meanwhile, however, demand for U.S. Treasurys is likely going down.

Why? Because of what's happening in the rest of the world.

The European Central Bank is expected to end "quantitative easing" in September. This program has kept interest rates on European sovereign debt super-low -- so low, in fact, that they were often negative. This caused lots of investors to avoid European debt and chase the relatively higher yields of U.S. debt instead.

When the ECB ends quantitative easing, the reverse will happen: Yields on European debt will rise. (In fact, they already are.) U.S. debt will look less attractive by comparison.

Additionally, the dollar has been getting weaker over the past year, and Treasury Secretary Steven Mnuchin suggested at Davos that this was by design. If you expect the dollar to continue losing value, investing in dollar-denominated assets such as Treasurys looks even less appealing.

"If I'm a European investor, and I've been facing negative interest rates for so long, I might begin to look at all these things and say, why am I buying Treasurys?" says Torsten Slok, chief international economist at Deutsche Bank. About half of U.S. public debt is currently held by foreigners, he points out.

Bottom line: If there are fewer buyers interested in the massive and growing supply of U.S. debt for sale, our borrowing costs will rise. Actually, that's already happening, too: Interest rates on 10-year Treasurys reached a four-year high Monday, which is part of the reason stocks have been going haywire.

All this means our debt could climb even faster than our increasingly spendthrift elected officials expect -- leaving us even fewer options when (again, not if) we actually need them.


Catherine Rampell's email address is crampell@washpost.com. Follow her on Twitter, @crampell.

(c) 2018, Washington Post Writers Group


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