Megan McArdle looks at last week’s Treasury auction of $14 billion worth of 30-year bonds and says that “descriptions vary from ‘weak’ to ‘horrible.’” It is true, investors did not display much appetite, so the government had to juice the yields it was offering to move the bills. As McArdle notes, that’s bad news for a government that needs to borrow vast sums of money to fund its deficit spending.
On Monday, however, Treasury had no problem selling $60 billion worth of three-month and six-month bills. Yields actually went down, a sign of investor demand. Of course, that’s exactly how you would expect it to be during troubled times. The safest place you can put your money right now is in extremely short-term U.S. Treasury bonds. They won’t gain you much in the way of return, but that, literally, is the price you pay. The longer the time frame, however, the more worried investors are about inflation and likely higher interest rates in the future.
McArdle and a host of conservatives are citing the Thursday auction as proof that Obama’s deficit spending will be a long-term disaster. And certainly, it’s hard to sugarcoat the gamble: It strains credulity to see how the U.S. can continue to borrow so many billions without consequence. The success or failure of Treasury auctions in the future will bear close watching.
But left out of the analysis is what would happen if the Obama administration had chosen to impose a fiscal austerity regime at the current juncture. Suppose the new administration had decided not to stimulate the economy, and abandoned any effort to spur development of renewable energy, or fix the healthcare system? Our long-term predicament could be much, much worse. It’s quite possible that without the stimulus money already coursing through the economy, along with the Federal Reserve’s immense efforts to increase liquidity and keep interest rates low (by, in large part, purchasing more and more Treasury bonds), the economy would still be accelerating into an ever-worsening downturn, rather than apparently leveling off. And if we don’t deal with healthcare costs or energy issues now, we could easily end up paying even more in the future.
Imagine if were looking at 20 percent unemployment, instead of 10 percent. Government revenues would be greatly reduced, while social welfare spending would inevitably be much higher. The Obama bet is that by investing now, we will save later. It’s a hell of a gamble, but not necessarily reckless or spendthrift. It might just be prudent.