Noam Schieber at the New Republic was getting word from Treasury as early as late 2009 that they thought that they needed “some signal to U.S. bondholders that it takes the deficit seriously” and “spending more money now [on stimulus] could actually raise long-term rates, thereby offsetting its stimulative effect.” This naturally lead to wanting to strike “grand bargains” with the other side, a path that lead the administration down some bad roads in terms of the agenda.
I was hearing the same thing, with more specifics; as I wrote at the time,
Well, what I hear is that officials don’t trust the demand for long-term government debt, because they see it as driven by a “carry trade”: financial players borrowing cheap money short-term, and using it to buy long-term bonds. They fear that the whole thing could evaporate if long-term rates start to rise, imposing capital losses on the people doing the carry trade; this could, they believe, drive rates way up, even though this possibility doesn’t seem to be priced in by the market.
It was more than economics. It was a philosophical/political choice as well.
Obama regularly offers three telltale notions that will define his presidency — if events allow him to define it himself: “sacrifice,” “grand bargain” and “sustainability.”
January 2009, folks, before the inauguration. Were they afraid of the bond vigilantes or were they just using that as an excuse to pursue their preferred agenda of “sacrifice, Grand Bargains and sustainability” (only the first of which was ever remotely possible)? I don’t know, but they seemed to have some very strong notions of what they wanted their legacy to be from the very beginning and it didn’t have much to do with interest rates.To listen to Obama and his budget director Peter Orszag is to hear a tale of long-term fiscal woe. The government may have to spend and cut taxes in a big way now, but in the long run, the federal budget is unsustainable.That’s where sacrifice kicks in. There will be signs of it in Obama’s first budget, in his efforts to contain health-care costs and, down the road, in his call for entitlement reform and limits on carbon emissions. His camp is selling the idea that if he wants authority for new initiatives and new spending, Obama will have to prove his willingness to cut some programs and reform others.The “grand bargain” they are talking about is a mix and match of boldness and prudence. It involves expansive government where necessary, balanced by tough management, unpopular cuts — and, yes, eventually some tax increases. Everyone, they say, will have to give up something.Only such a balance, they argue, will win broad support for what Obama wants to do, and thus make his reforms “sustainable,” the other magic word — meaning that even Republicans, when they eventually get back to power, will choose not to reverse them.
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