I commented a few days ago on Paul Krugman’s views about the current state of the bond market and mentioned the fact that Pimco has sold all of it’s US government debt, while the Federal Reserve is the largest buyer of US debt. Today Megan McArdle has a good piece in The Atlantic on the same subject. She interviews Bill Gross, the head of Pimco, as well as economist Carmen Reinhart. I thought the following was pretty interesting -
Some observers point to our current low interest rates and ask, “Why worry about deficits right now?” Paul Krugman, for example, regularly derides the people who are worried about the “invisible bond vigilantes.” But of course, as Gross says, what’s keeping Treasury-note prices low is not so much the free market as the behavior of central banks, which are buying for reasons that have nothing to do with their assessment of our fiscal rectitude.
Reinhart, who has done extensive research on the topic, was even more dismissive of Krugman’s analysis. “Are interest rates a good indicator of impending crises? The resounding answer is no.” Deficit doves seem to assume that bond interest rates will act as a sort of early warning system: when they start to creep up, then we should start cutting our deficits. But Reinhart argues, “Before the crisis, Ireland’s rates were imperceptibly higher than Germany’s.” By November 2010, the Irish were paying an extra 6 percent annual interest to borrow money. “I certainly wouldn’t call this my baseline scenario for the U.S.—but the message is: think the unthinkable.”