US 10-Year Breaches 5% as Inflation, Supply Worries Mount
bloomberg.com
bloomberg.com
Government debt yields on the short end are set by the Fed. Long yields are "set by the market" based on inflation fears, and mostly guessing what the Fed will set rates to over the next 10+ years.
Japan had way higher Debt-to-GDP for decades, yet the long term yields were low. Why? The central bank said "we anticipate yields to be set low for a long time" and did so for a long time. Recently they said they are going to "respond to inflation" like all other central banks and suprise, surprise the long end is creeping up. "Bond vigilantes" came into existence as soon as the central bank changed their policy.
It is possible to break this cycle, but it requires getting spending under control. As long as you operate in deficit, it requires finding private capital to finance future operations of the government. That private capital will require interest commensurate with the expected future devaluation of its principal to lend; otherwise they are just suckers. If you can bring spending into balance then you can hike rates and bring inflation under control and you'll be somewhat insulated from what bond purchasers are willing to accept, but if you can't then increases in rates just increase government spending as well.
Japan operated at extremely high levels of debt-to-GDP because their deflationary trap turned all major Japanese corporations into large net savers. Why would you hold debt when you have to pay it back in more valuable yen in the future? That created a very large oversupply of private capital, which crowded into government bonds as the spender of last resort.
The yield increase is basically the market pricing in the interest rate increases since they're expected now.
Given the wealth distribution of the population has become so unequal, raising taxes for the purposes of lowering the deficit is a politically impossible option. So the only politically feasible option is controlling spending.
I'd like you to spell out your thought process, because I completely disagree with the relationship between your given and your conclusion, and I'd like to know what you're thinking.
It is generally accepted a wealth tax will not directly meaningfully lower the deficit. There's also examples of those who would be affected spending massive sums of money lobbying against such taxes and threatening capital flight. These are generally the same group of people as political donors.
Studies also show 84% of people across the top 36 major countries believe wealth inequality is a problem in their country. This leads me to draw the conclusion that politically popular tax policy and wealth inequality are closely intertwined.
All these things considered, a political party evaluating the risk of policy changes on their polling would always pick the option of reducing spending.
The only difference is that the US can inflate away their debts and the world will keep buying the usd.
The EU had to impose strict austerity, and essentially all the banks stopped providing any liquidity to businesses. Entrepreneurship and research just died overnight.
(edit: I guess a lot of people still aren't ready to hear it)
It's because the country went through the great recession and was attempting to pull out and avoid financial collapse.
Look at Revenue per year as a % of GDP and look at Expenses per year as a % of GDP. It's pretty clear.
Expenses went up avoiding a depression which was done successfully, and revenue dropped due to the falling economy. The president was handed a collapsing economy and saved it.
The issue is the other party that keeps getting handed great economies since the late 90s and fails to do anything but make the problem worse.
If Democrats win they are going to be blamed for being the "bad guys" for increasing taxes, controlling inflation and trying to get the economy back to shape.
For Republicans to burn down the economy during their mandates has paid of as the next government needs to focus on firefighting instead of doing the good that it could have been done.
The last small-government Republican was Herbert Hoover. Reagan paid lip service to the concept, but he maintained high spending levels to keep former FDR democrats in the fold.
Why would you ever think they’d be interested in doing any of that? A non-insignificant fraction of the gop wants to collapse the US entirely.
(Sarcasm noted.) There was a bitter joke about Islamist takeovers by elections after the Arab Spring: "One man [literally], one vote, one time."
To me, it seems more likely to concentrate power among people who don't want to make things better and make it easier for them to resist ever changing.
I would ask you to "do better", but the whole problem is that once you've bought into the contradictions of destructionism, there is no doing better without coming to terms with what you're actually advocating. Talking about an "an Argentina-like reset" you're closer than most, but I suspect that's due to a better ability for rationalization.
In other conversations of ours, you've gone on about the need to preserve American culture in the face of immigration. So once again I will implore you personally, to do your part by working to adopt our culture rather than proudly championing the exact zero-sum politics you're bemoaning (regardless of having changed the color of the partisan flag you're waving). A core tenet of American culture is personal responsibility (for better and for worse), and so these types of choices right here are where the rubber meets the road.
It's not a partisan point at all, it's an observation about how immigration and changes in the polity interacts with politics. Left-wing parties rely on immigrants for votes all over the developed world. And the larger topic of how foreigners influence a democratic system is one Aristotle was writing about even in 350 BC.
> do your part by working to adopt our culture rather than proudly championing the exact zero-sum politics you're bemoaning
You should read up on game theory. It doesn't matter what I do, the millions of other immigrants that come to the U.S. will change its culture to be more like their homelands'. Your only choice is whether you want the left-wing version of those countries' politics, or the right-wing version? Both result in fiscal disaster, followed by an Argentina-style correction. (We should be so lucky--Javier Milei seems to be doing a pretty good job.)
> You should read up on game theory. It doesn't matter what I do
How does this differ from "I might as well drop my trash on the ground in the park, because everyone else is going to do it anyway" ?
You're fallaciously excluding the middle - there will always be some people who drop their trash on the ground. So a clean park must employ groundskeepers to pick it up. But such centralized action can never make up for mass distributed behavior, so it behooves us all to adhere to and propagate good culture that keeps most people from throwing their trash on the ground. And the same dynamic applies to basically every societal construct.
So no, I do not buy your [self-serving] argument that the culture you're simultaneously bemoaning and also engaging in is inevitable.
Debt per GDP/size of US economy is more useful. Debt/GDP has the 2008 jump as the Obama Admin tried to (but not nearly enough) stimulate out of the housing crisis. Debt/GDP looks flat until 2020.
2008 and 2020 jumps make sense in the setting the 2008 crisis and COVID which was effectively a recession assuming you believe in Keynesian economics.
Paying for US debt if you are the US is cheap when interest rates low. Trump/Bessent/Elon have been doing everything they can to drive up inflation, so now interest rates are necessarily going higher...
Remember that 2008 was still Bush, Obama didn't become president until 2009.
Both of your examples show the aims and actions of the Republican Party. It isn’t bipartisan.
On the other hand, the biggest debt increases under Republican presidents have been to A) Start and fight multi trillion dollar wars in Iraq and Afghanistan and B) To cut taxes for billionaires and corporations.
If I recall though, you personally did support Obama? Which would make your point doubly moot.
Also note that my condemnation wasn't just about the debt per se, but rather the decreasing creditworthiness. Say what you will about Obama (I certainly have), but at least he kept up relations with our allies so they saw us as a strong partner worthy of holding their wealth.
I did personally support Obama. I still think he was a pretty good President! I’m simply describing the chart I linked to of debt levels on a log scale. Obama increased the slope of debt growth around 2010 and it has stayed around the same slope, with a vertical jump during covid. The point is that the debt growth rate isn’t a Trump thing. It’s the “new normal” since Obama, Trump, Biden, and Trump again.
If you personally don't care about the debt, that's fine. But there are a lot of people who had claimed to, who have now turned their denial circuits up to 11. My "$40T more in the hole" aside was aimed at them.
Unfortunately the right asset to hold depends on why rates are going up. If you believe that rates are going up because we're in for high inflation rates ahead and so bondholders need to be compensated for expected face-value depreciation, then you should buy hard assets (gold, oil, Bitcoin) or stocks that generate a lot of cash now (utilities, FANGs, commodity producers like oil companies). But if you believe that rates are going up because the Fed is going to hike rates and get inflation under control, the right asset to hold is cash. Every other asset will lose value as rates go up and cash becomes scarce, and then you can pick them up cheap when we get the inevitable steep recession.
God help me this market has me considering BTAL, DBMF, TAIL puts, intl equity and gold......