Monday, March 14, 2011

Fix the budget or else ... the bond market will make you

Just like students get good grades from their teachers for good performance, countries get good grades from the bond market for living within their means (i.e. expenditures don't greatly exceed revenues).  Good grades from the bond market come in form of low borrowing costs, i.e. low interest rates, on government debt. The U.S. is currently able to obtain low borrowing costs from the bond market - but that will change if we don't tackle our long term spending problem.

To see how the bond market can "school" countries, just look at  Greece in 2010.  The international bond market decided that Greece's economic policies were unsustainable, and began charging Greece a  much higher interest rate when it issued new bonds (to payoff old ones). Greece was forced to make major cutbacks in pay and benefits for public employees, and government programs. There were riots in the streets.


Bloomberg 3-7-2011 Interview of JP Morgan's Chief Economists (5 min)

As a rule of thumb, a country starts getting in trouble with the international bond market once publicly held debt reaches 100% of GDP. The U.S. and many other countries will be there soon.  To read about the latest progress in addressing the U.S. budget problem now (before the bond market makes us) read:

WSJ (3-14-2011) Serious Debate on the Budget has Started

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