Democratic presidential front-runner Bernie Sanders is pledging to spend big and fund it all with new taxes, drawing flak from rivals who say his budget numbers don’t add up.
But bond investors say they don’t really need to. And more and more economists are inclined to agree.
It’s never been cheaper for the U.S. government to borrow money. In the past few days, as Sanders fended off the “how will you pay for it” questions about his plans for universal health and childcare, yields on Treasuries were hitting all-time lows -- to as little as 1.3% on benchmark 10-year bonds.
Fear of the coronavirus is driving the latest plunge. Yet interest rates have broadly been in decline for about 40 years, even as the national debt has lately headed in the opposite direction. That’s forced a big rethink among economists. They used to fret about the shortfalls that result when government spending exceeds revenue. They sound much more relaxed nowadays.
‘That’s the Worry’
Modern Monetary Theory, an unorthodox new school of economics, can claim to have been ahead of that curve.
“Putting too big a demand on resources, and causing inflation -- that’s the worry about deficit spending,” said Randall Wray, a senior scholar at the Levy Economics Institute and one of MMT’s founders. “We don’t have any inflation pressures now.”
If that used to be a lonely argument, it’s becoming less so. Even mainstream economists like Larry Summers and Paul Krugman, who’ve been critical of MMT and of Sanders’ expensive plans, agree that public debt ranks way down America’s list of problems.
Bond markets have been unfazed as deficits widened toward $1 trillion, almost 5% of gross domestic product, under President Donald Trump -- likely pushing federal debt held by the public above 80% of GDP this year.
“I don’t think we can learn that much from debt ratios for advanced countries. What matters more is the market’s expectations of inflation,” said Kallum Pickering, senior economist at Berenberg in London. And those “seem to be pretty low for now.”
‘Fiscal Taps’
That could change if a Democratic president piled more deficit spending on top of Trump’s. There are probably limits to the long downward drift of interest rates, and big-spending governments could test them, according to Pickering.
“If we turn on the fiscal taps through debt financing, as long as the politics doesn’t overwhelm the economic fundamentals, bond yields should gradually rise from here,” he said, though he expects any increase to be “modest” by past standards.