Government Debt Increases Interest Rates: Yeah, Right

June 7th, 2011

This is one of those graphics that speaks volumes about how right-wing economists are completely divorced from reality.

They point to the sun rising in the east and say, “You see? I told you sun rises in the west.”

Traders Crucible shows you the pictures:

And he runs the numbers:


I’m not making any grand statements here about how money economies work. But I’m making a pretty strong statement about how they don’t work. They don’t work the way freshwater economists say they do.

  1. June 8th, 2011 at 16:59 | #1

    Forgive me, the only thing I agree with in your post is that Niall Ferguson is a dope.

    The first graph makes me very uncomfortable. I don’t dispute the numbers it shows. But I am very concerned about the numbers it fails to show. It fails to show debt other than government debt. Here’s the vision I’m pushing:

    At the Traders Crucible post, these conclusions —

    Higher levels of government spending have resulted in lower bond yields for the last 50 years. Lower levels of government spending resulted in higher bond yields over the last 50 years. The data isn’t really disputable.

    are disputable because they are based on as little as 25% of total credit market debt. It is not clear that government spending resulted in anything.

    Pretty graph, though.


  2. June 10th, 2011 at 17:29 | #2

    Great find, thanks!

  3. Ted K
    June 12th, 2011 at 05:23 | #3

    I got Ferguson’s book on big daddy Warburg, and the 2nd of his Rothschild books. The books were super cheap and the Warburg book starts off well so I have hopes both will be a fun and educational read. So my thoughts on Ferguson are this: He is good at reading large amounts of history, amalgamating it, and then regurgitating it in an educational way.

    When it comes to economic policy, Ferguson’s a fu*king idiot.

    But that idiocy maybe be a type of “convenient idiocy” which is common among the political right when finding rationalizations for crushing poor people under a tank or foreclosing on their homes that can get their 2 extra basis points on their garbage bonds they bought. See the CRE as an excuse was so much crap it wouldn’t even be worth mentioning if the cocksuckers didn’t bring it up all the time, like the welfare Mom driving the Cadillac that I never met. So Republicans never explain why bondholders and bankers can never take responsibility for the mess they created. Including we are now paying for foreign bankers’ losses now. See here:
    and here

    Interesting to note, when Jamie Dimon got to ask Bernanke his one question, he never asked about all that Fed money that goes to “recapitalize” (recapitalize= welfare checks for banks) foreign banks. I guess Jamie Dimon’s cool with large FOREIGN banks getting free money from the Fed. But lowering debit card fees to citizens of his OWN COUNTRY really pisses Jamie Dimon off to no end.

  4. June 12th, 2011 at 05:29 | #4

    I meant to say “CRA” (Community Reinvestment Act) in the above, not CRE. sorry

  5. June 16th, 2011 at 08:44 | #5

    This is a great graph. You might want to redo it using inflation-adjusted interest rates rather than nominal ones, tho. The same basic picture will still be present, and you’ll deal with the obvious objection that this is a spurious correlation based on the fact that higher inflation (automatically) lowers the debt–GDP ratio and (usually) raises nominal interest rates.

  6. June 16th, 2011 at 10:59 | #6

    @JW Mason Good suggestion. I didn’t put together that graph, though, don’t have the data immediately to hand. Would love to see it though…

  7. June 16th, 2011 at 13:36 | #7

    This should work.

  8. June 16th, 2011 at 15:20 | #8

    Thanks, JW! Can you parse the legend for me? I can deduce what it’s describing, but without a fair amount of work and thinking I can’t be perfectly clear and confident in my mind — at least not enough to describe/cite it to others. L’il help?

  9. June 17th, 2011 at 14:29 | #9

    Blue line is the nominal yield on five-year federal debt.
    Red line is that yield minus inflation as measured by the year-over-year change in the GDP deflator.
    Black line is the ratio of debt held by the public to GDP.

    So the black line in this graph is the same as the blue line in yours.
    The blue line in this graph is basically the same as the red line in this yours.
    And the red line in this graph adds the inflation-adjusted interest rate on federal debt.

    Note that while I personally do not think the deficits of the 1980s contributed to increase in rates then, the inflation-adjusted graph doesn’t refute that so clearly. But it continues to make to make it clear that government borrowing over the past 25 years has not been constrained by bond vigilantes.

  10. June 17th, 2011 at 14:30 | #10

    (I’ll probably put a version of this up on my blog in the next couple days, along with some comments on that Galbraith piece.)

  11. June 17th, 2011 at 18:05 | #11

    Thanks JW. Not surprisingly, the only pronounced divergence, nominal to real, is the mid 70s. Doesn’t really change the story I see there, which is “little or no eyeball correlation, anyway…”

    I’m more and more coming around to the MMT story (or my understanding of it), that it’s the flows that affect inflation, not the stocks. “Money supply” (I think better called the “money stock” because “supply” suggests a flow), which everybody spends so much time arguing about (M0? M1? M2? M3?) might be fairly immaterial to inflation, except maybe as a divisor to gauge flow changes over a period….

    And in MMT world, doesn’t money stock = government debt? Or (same thing?) cumulative deficits since….?

  12. wh10
    June 23rd, 2011 at 11:30 | #12

    @The Arthurian
    The post wasn’t trying to show what the debt was or wasn’t causing. It was trying to debunk the notion of bond vigilantes in a floating exchange rate, fiat monetary regime. That is to say, higher debt doesn’t have to mean higher interest rates- like it does in fixed exchange rate or commodity based systems.

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