Megan McArdle says that we may already be having a problem with sovereign debt risk:
Obama’s spending plans are extraordinarily ambitious. His projected deficits for the rest of his possibly presidency are higher than the “runaway” deficits that plagued most of the Bush administration–and after the first few years, that’s not stimulus, that’s ordinary spending outstripping revenue. For a while now, I’ve been asking people at conferences, on and off the record, what America’s sovereign debt risk is? That is, how long until people stop treating treasuries as the “risk free” securities, and start demanding a premium for the risk that we might default.
The answer from the right has been a nervous (perhaps hopeful) 2-3 years. The answer from the left, and professional Democratic wonks, is some unspecified time in the future. Probably, there will be a Republican in charge. Markets hate Republicans.
But last Thursday, the Treasury auction was . . . well, descriptions vary from “weak” to “horrible”. This raises the unpleasant possibility that markets are, as my business school professors insisted, “forward looking”. Voters may believe that getting a bunch of special interests to agree in principal that costs should be cut is the same thing as actually cutting costs. Bond markets don’t…
…Obama can assure voters that he inherited these deficits. But bond markets pay closer attention to the fact that Obama has already increased the projected deficit he inherited by 50%.
Let’s hope that the voters figure it out soon, and before Treasury has to start paying high interest on T-bills.