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If you ever point out to people that the bond market is pricing in an approximately zero per cent chance of the US running into fiscal problems, they’re sure to respond with something along the lines of “well, markets can be irrational, just like with subprime securities before that collapse.”And it’s true. Markets can be “wrong.”
But here’s the difference. The US debt situation is the most dissected, analysed, fear-mongered thing there is. People have been examining the numbers in grisly details for ages, proclaiming the government’s insolvency.
In a recent note, JPMorgan’s Michael Cembalest listed some of the recent published warnings:
* From Jim Grant’s Interest Rate Observer, a mock prospectus on the United States as if it were a corporation offering its trillions in debt for sale to the public
* A January 2011 paper from the Committee for a Responsible Federal Budget, a group made up of former directors of the CBO, the OMB, the House and Senate Budget Committees and the Federal Reserve Board of Governors
* “The Financial Condition and Fiscal Outlook of the U.S. Government”, a slide deck from David Walker, President of the Peter G Peterson Foundation and Former Comptroller General of the United States
* An IMF paper from April 2011, “An Analysis of U.S. Fiscal and Generational Imbalances: Who Will Pay and How?”
* An April 2011 piece from PIMCO’s Bill Gross piece entitled “Skunked”
* And demonstrating that there is in fact a second act in American lives, former internet research analyst Mary Meeker’s 460- slide behemoth entitled “USA Inc”, distributed by venture capital firm Kleiner Perkins Caufield & Byers
Also, we keep getting example after example — such as the carnival shut show this past weekend — confirming that politicians are unable of tackling this.
And yet the market doesn’t care. This is exactly the opposite of with subprime, where the market was starting to creak, and yet everyone was proclaiming how it was “different this time” and how frozen markets were being irrational.
In one the market sent an early warning. In the other (US debt), it’s all politicians and pundits waving their arms, while the market doesn’t react at all.