Podcast Summary
The U.S. government's borrowing capacity expansion: Since the early 1990s, the U.S. government's borrowing capacity has expanded, enabling large-scale spending on crucial COVID-19 relief measures without significant economic disruption
The U.S. government's ability to borrow and spend trillions of dollars without raising taxes or cutting spending on other areas is a recent shift that has significantly impacted the economy. This change, which is not fully understood, has allowed for the funding of crucial COVID-19 relief measures, such as unemployment benefits and vaccines. This shift began around the early 1990s when the old rules about government borrowing were still in place, and deficits and interest rates were increasing. However, over the past decade, the government's borrowing capacity has expanded, making large-scale spending possible without causing significant economic disruption. This transformation, as discussed on NPR's Planet Money, is a crucial factor behind the implementation of various stimulus measures during the pandemic.
Fear of High Deficits and Impact on Interest Rates: During Clinton's presidency, concern over federal deficits led to obsession with bond market, as higher deficits could lead to higher interest rates, affecting government and individual borrowers.
During the Clinton administration, there was a significant concern about the federal deficit and its impact on interest rates. Higher interest rates meant the government had to pay more to borrow money, and this increase would also affect individuals and businesses with loans. The obsession with the bond market during this time was due to the fear that high deficits could lead to higher interest rates, which in turn could hinder economic growth. The bond market, managed by bond traders, has the power to influence interest rates by deciding which bonds to buy and sell. These traders demand higher interest rates when lending to borrowers with high debt levels, creating a risk for the economy. James Carville, a political advisor to President Clinton, famously quipped that he wanted to be the bond market due to its significant influence.
Concerns over bond traders and deficit during Clinton era: During the Clinton administration, efforts to reduce the deficit led to lower interest rates and economic growth, but during the 2008 financial crisis, a large stimulus bill funded by deficit spending was successful in boosting the economy, changing the perspective on deficit reduction in the short term.
During the Clinton administration, concerns about bond traders demanding higher interest rates due to increased government borrowing led to a focus on reducing the deficit. This deficit reduction effort, which included tax increases and spending cuts, resulted in a fall of the deficit to zero and lower interest rates, leading to more investment and economic growth. However, during the financial crisis of 2008, despite the economic downturn, there was a push for a large stimulus bill funded by deficit spending. The success of this stimulus in boosting the economy led to a shift in thinking about the importance of deficit reduction in the short term.
Bill Gross's decision to sell U.S. Treasuries didn't raise interest rates: Despite rising deficits, interest rates remained low after Bill Gross sold U.S. Treasuries, demonstrating the unpredictability of financial markets
The actions of a powerful bond manager, Bill Gross, and his decision to sell off U.S. Treasuries due to concerns over increasing deficits, did not result in the expected rise in interest rates. Instead, interest rates continued to decline, leaving Gross and his investors in a difficult position. This event marked a significant shift in the bond market, where interest rates have remained historically low despite rising deficits. The world's largest bond fund, PIMCO, led by Gross, sold off all its government bond holdings in a dramatic move, but the outcome was not what was anticipated. This incident highlights the unpredictability of financial markets and the challenges of making accurate predictions about their behavior.
Low-interest-rates due to increased dollar supply and low inflation expectations: The current low-interest-rate environment is driven by the Federal Reserve creating new dollars and low inflation expectations, leading bond traders to buy treasury bonds and keep rates low, but the full understanding of this phenomenon is uncertain
The current low-interest-rate environment is driven by both an increased supply of dollars to lend and low inflation expectations. The supply of dollars has gone up due to the Federal Reserve creating trillions of new dollars. At the same time, inflation has remained low for over a decade, leading to a self-fulfilling prophecy where low inflation expectations contribute to actual low inflation. These factors have led bond traders to continue buying treasury bonds, keeping interest rates low. However, it's important to note that economists are still trying to fully understand this phenomenon and there is uncertainty surrounding it.
Congress's Swift Response to the Pandemic with Large Stimulus Packages: Economists were surprised by Congress's quick response to the pandemic with large stimulus packages, but there's now resistance due to interest rate risk and lessons from the last crisis. Understanding deficits, inflation, and interest rates is crucial.
During the pandemic, Congress acted swiftly and without budget constraints, spending more than ever before outside of World War II. Economists, including Jason Furman, were pleasantly surprised by this response, as they believe Congress should have spent more during the 2009 financial crisis. However, there is now more resistance to borrowing and spending trillions of dollars, even from some economists who previously advocated for large stimulus packages. This shift in perspective is partly due to the objective difference in interest rate risk and partly because of the lessons learned from the last crisis. While some argue that borrowing and spending so much money could drive up inflation and inflation expectations, others warn against repeating the mistake of not spending enough during the financial crisis. Ultimately, the bond market serves as a reminder that actions have consequences, and it's essential to understand the complex relationship between deficits, inflation, and interest rates.
Bond traders predict economic trends and bet accordingly: Bond traders make predictions about economic trends, including low inflation and interest rates, to make profits. Stay informed about various economic topics through NPR's Planet Money newsletter.
Bond traders, like other financial market participants, make predictions about economic trends based on their analysis and bet accordingly. Currently, they believe that low inflation and interest rates will persist in the future. Meanwhile, it's important to remember that their role is to make profits, not to appear on TV or promote political agendas. Additionally, for those interested in staying informed about various economic topics, consider subscribing to NPR's Planet Money newsletter, which covers a range of topics, including the latest on student loan forgiveness. On a different note, the tragic shooting at the Capital Gazette newspaper in 2018 serves as a reminder that mass shootings can target individuals based on their jobs or other aspects of their identity. NPR's Embedded series covers the experiences of the survivors in this incident.
