In heralding rising US government bond yields as a welcome sign of normalization, Martin Wolf overlooks a number of key points, which would lend themselves to a very much less sanguine interpretation than his of these developments for global economic recovery prospects.
First, Mr. Wolf omits mentioning that the recent dramatic back-up in US long term bond yields is occurring in the context of a renewed plunge in the value of the US dollar, which is undermining foreigners' willingness to add to their already large US dollar-denominated debt holdings. It is also coinciding with fears in market circles and in China that the sea of rid ink expected to flow from the Obama Administration's highly expansive long-run public spending program poses the real risk of an eventual loss of the US government's AAA rating.
Second, Mr. Wolf fails to mention that rising US government bond yields are now causing a parallel sharp rise in US long-dated mortgage rates, which is hardly helpful to the government’s efforts to stabilize the all important US housing market.
Third, Mr. Wolf glosses over the deleterious impact on the global economy of the plunge in the US dollar that is being precipitated by fears about long-run US debt sustainability and by the fear that quantitative easing might imply the monetization of that debt. For not only is the rising dollar fueling a sharp run-up in international oil prices, it is also putting into jeopardy any prospect of an export-led recovery in the highly export dependent German and Japanese economies.
One can certainly agree with Mr. Wolf's assertion that premature withdrawal of US fiscal stimulus would be a mistake until the US economic recovery took hold. However, this line of reasoning fails to make a distinction between the Obama Administration's US$780 billion fiscal stimulus package over the next three years and its longer run budget proposal, which the Congressional Budget Office estimates will result in a doubling in the US public debt ratio from 41 percent in 2008 to 82 percent by 2009.
One would think that an overriding priority for the Obama Administration must be to come up with a credible long-run fiscal plan to convince the markets that the US debt will remain on a sustainable path. One would also think that this could be done without in any way diluting the short run fiscal stimulus that the US economy so desperately needs at this time.
Desmond Lachman is a resident fellow at AEI.