Photo: US Navy
It’s perhaps annoying to Tim Geithner that despite the circus in Washington DC, Treasury investors haven’t shown an iota of panic.This should immediately raise eyebrows for anyone (including Geithner!) who thinks that ultra-low rates in the US are somehow an expression of ‘confidence’ in the US system.
Let’s be honest, the leaders in Europe, with their well-intentioned regulators, and regular meetings of finance ministers and so on have shown a lot more seriousness about the problems facing the PIIGS than the leaders in the US. And those are folks from different countries getting together!
If it were only a matter of confidence in leadership, Europe would be leading the US by a mile.
By this point, you should realise that the US is fundamentally a different beast than the Eurozone, with a fiscal structure far more similar to debt-heavy Japan, another ageing country with mountains of public debt (far more than the US has, actually) that also pays ultra-low rates.
Japan isn’t threatening to destroy itself, with a political fight that could lead to default, but it’s hardly the most credible government in the world. For one thing, its politicians have a reputation for resigning left and right. It’s also considered by many to be one of the worst fiscal basket cases in the world, having been downgraded several times by the ratings agencies, while savvy hedge fund managers make gigantic bets against the country.
There are a few big differences between the US and Japan:
- The US Dollar, not the yen, is the world’s reserve currency.
- Japan runs a huge trade surplus.
- The vast majority of Japan’s public is domestically owed (where is only a modest majority of US debt is domestically owed).
You could go back and forth debating which country is more structurally sound (our vote is for Japan), but neither pay low rates due to confidence. They pay low rates because they’re huge economies that issue debt in their own currencies… and the reason their rates are ultra-low these days is that neither are exhibiting much growth, so their debt is a natural safe-place to go to in the avoidance of risky assets.
So the next time someone says: If the US doesn’t get its act together, global markets will lose confidence in our debt. Just tell ’em: The world already has, but it really doesn’t matter.