March 30, 2010

MEGAN MCARDLE: Why is the Term Risk on Long Term US Debt So High? “It’s impossible to say which prevails, but it’s not unreasonable to assume that there’s at least some default risk pricing in. Our entitlement problem is about to open a gaping hole in the budget, and so far our solution is . . . to enact more entitlements. Unless our politicians start outlining some credible plans for getting our demography-driven disaster under control, bond markets would be perfectly rational to demand a discount that reflects a possible future fiscal crisis.”

UPDATE: A hedge-fund reader emails:

The credit-risk issues with US debt are literally yesterday’s news. Of course there’s a rational fear the Keynesian madmen in Washington will shaft our creditors by outright welshing or inflating away the debt.

The real story going forward will be the hit to the economy from crushing taxes imposed “to be fiscally responsible”. Naturally the
taxes will drive capital overseas and activity underground, further hollowing-out the economy and making the govt’s finances even worse.

How THAT game plays out is the real question going forward.

Indeed.

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