An opinion editorial in Al-Jazeerah yesterday expressed deep concern about how the US government will ever be able to pay its national debt, and about who will get stuck with the bill. The author’s concern parallels the opinions already being loudly expressed by our own Blue Dog Democrats, all other Democrats, many Republicans, our government’s comptroller general, the Concord Coalition, nine out of ten American journalists, and nine out of nine foreign journalists. Financial doomsday is just around the corner, according to just about everybody.
Should I start looking less favorably on those US Treasury bonds I plan to bequeath to my granddaughter? I know exactly what happens when a borrower is on the way to financial collapse: lenders figure it out, and interest rates on that borrower’s new debt instruments go to the stratosphere. The old bonds become worthless, and I’d then be left holding the bag.
Al-Jazeerah is so concerned about our debt that they display a US National Debt Clock on their home page. Tick, tick, tick. Their clock is presumably modeled after the ones used by the Blue Dog Democrats and the Concord Coalition. [I hate to break it to all of them, but those single-entry-accounting debt clocks are now obsolete because of the new, Twenty-first Century debt clock at the upper right of this website.]
Anyway, it’s almost unanimous: financial doomsday is just around the corner for good ol’ Uncle Sam. But wait ... hold on there just one minute: there’s a big, big disconnect. Something doesn’t add up, and nobody’s explaining it—not Al-Jazeerah, not the Blue Dog Democrats, not the Concord Coalition, not the Republicans who should know better. Nobody.
The discrepancy is this: The free-market buyers of US Treasury securities—many US citizens and many foreign buyers—are currently demanding a mere 4.91% interest on the USA’s 20-year constant-maturity Treasury note. Not only that, but that interest rate has been declining. Click on this thumbnail and look at the blue lines:
Judging from the interest rate on long-term US Treasury securities, America’s bond-buying customers are apparently becoming more and more optimistic about America’s future, not more and more alarmed. So the question nobody is asking (or answering) is this:
If America is headed for financial doomsday as everyone says, why are long term interest rates remaining low—even declining—instead of skyrocketing? Hello? Al-Jazeerah? Blue Dogs? Concord? Anyone? Are you doomsters all smarter than the collective millions who buy US Treasury securities? If so, what do you know that they presumably don’t? If not, then what do they know that you’re ignoring—and why are you ignoring it?
To me, the silence on that question is deafening.
I guess our bond-buying customers are not buying Al-Jazeerah op-eds, Blue Dog Democrats’ speeches, or the Concord Coalition’s head-for-the-hills literature. I guess they’ve rejected all that disaster-mongering, opting instead to continue having faith in America’s future. Are they misinformed idiots? Or do they know something Al-Jazeerah and the Blue Dog Democrats don’t know?
I guess the bond-buyers, Group B below, still have faith that when their bonds mature in the future, they will collectively become Group A. In other words, the bond-buyers know there's a simple answer to Al-Jazeerah's urgent question Who will pay the US national debt? The answer is, The US government will pay it using a well-known action called rollover. It’s nothing new; it’s the same process that’s been happening ever since the beginning of the market for US Treasury securities.
Again, the process above is called “debt rollover.” Every bondholder is paid back her principal when her bond matures; there are no defaults. It can continue indefinitely into the future, as long as the bond buyers have confidence in the borrower’s future. They communicate their degree of confidence through the interest rate they demand—4.91% as of last Friday. Sounds to me like they have a good deal of confidence. Unfortunately, it also sounds to me like everybody else is trying their darndest to talk Group B into becoming pessimistic—but it’s not working, is it? The US economy just keeps on growing, the US government's tax receipts keep growing, as does its ability to meet the growing interest payments with ease, and the bond buyers keep expressing their confidence in America's future by continuing to re-up their investments in T-bonds. The doomsters are persistent, but their rhetoric just isn't having much effect on the bond buyers.
It’s not working on me, either—but thanks anyway for the advice, Al-Jazeerah, Blue Dogs, and Concord. If you don’t mind (...and even if you do), I think I’ll keep buying those T-bonds for my granddaughter.
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UPDATE, 10-02-2006: Two emails have informed me that the "Al-Jazeerah" website at the link above is not the same as the TV station. Here are some excerpts from those emails:
...the Al-Jazeerah you refer to in your latest post is not related to the TV station of the same name. This appears to be just your average anti-American hate site, not backed by a major organization.
The real Al Jazeerah is at www.aljazeera.net, with the English version at english.aljazeera.net
Because the website of the fake Al-Jazeerah is still up and running, I have to presume that the real Al-Jazeerah doesn't mind whatever copyright or trademark infringment is happening.
