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Who's Afraid of the Big Bad Interest Rate?


The chart atop this post tracks the interest rate of 30-year Treasury bonds since 1977 (click here for a larger version). Does it look like we're at a historic high to you? Probably not. It looks like the rates are lower than, well, any time except the last few months. And the last few months were a rather exceptional period: Every investment besides Treasury bonds looked liable to collapse, and so there was a sudden and massive upsurge in demand for the historically safe offerings of the U.S. government.

But historian Niall Ferguson thinks that small rise you see at the rightmost edge of the chart represents the market's verdict that the United States government is running unsustainable deficits. "The bond market is quailing," he asserts. But it sure doesn't look that way. It looks like the bond market is rising a bit because investors are finally thinking it safe to invest in other things. That's a good thing. A world in which the continued creditworthiness of the U.S. government is the only safe investment is a bad thing. This is the view of Paul Krugman, Martin Wolf, and Dan Gross, among others.

But Gross goes further and attaches a nice bit of political analysis to his economic forecasting, arguing that the sudden concern over historically low interest rates has an ideological component.

H.L. Mencken tagged the Puritans as people possessed of the "haunting fear that someone, somewhere, may be happy." Ferguson represents a strain of intellectual Toryism bedeviled by the haunting fear that someone, somewhere may be getting social insurance.

Which seems about right. The story we're being told about the bond markets is that they represent market terror over increased government spending and so now that we have bailed out the banks and backed up AIG and quantitatively eased the markets and bought up the auto industry, it is time for the federal purse to close. The market can accept the near nationalization of the financial sector, but not the provision of universal health insurance. It's a good story. It just isn't true.

(Graph credit: Yahoo Finance)

By Ezra Klein  |  June 5, 2009; 11:03 AM ET
Categories:  Financial Crisis , Solutions  
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Next: Why You Should Not Treat the Stock Market Like Gallup


Depends on what you mean by "the market".

Posted by: paul314 | June 5, 2009 11:28 AM | Report abuse

Isn't that a graph of nominal interest rates? Isn't the concern REAL interest rates? I don't have the data right in front of me, but I believe that inflation is very low right now, relative to other periods of time. I don't know, but I think the current interest rate could look higher historically if you were adjusting for inflation. That might be a more useful comparison for readers.

Posted by: troeper | June 5, 2009 11:57 AM | Report abuse

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