Cato’s Doug Bandow starts out with the observation that foreign demand for U.S. Treasuries is down:
So what will become of us all? Well, it’s pretty obvious. At this same time, household savings rates in the United States have gone way up. On one level, that’s pushing us further into recession. On another level, that’s necessary because household savings have been way too low. Still, Bandow is very concerned:
It’s difficult to accurately predict future demand. But U.S. borrowing will be truly staggering in coming years. If international demand is down, the Treasury will have to rely on American investors. Whether the domestic market can easily absorb so much debt — and particularly, to what extent federal debt offerings will crowd out private investment during what we hope will be a recovery — are questions that our spendthrift leaders have not bothered trying to answer.
These aren’t question they’ve “bothered trying to answer” because the future is inherently unpredictable and there’s no need to try to guess the answer. We have no way of knowing whether or not hypothetical future deficits will crowd out hypothetical future private investment at some hypothetical future point. But we do have a good way of telling, at any given time, whether or not this is what’s happening. You can tell because because interest rates go up. It was high interest rates that led the Clinton economic team to conclude in 1993 that it was more important to reduce the deficit, thus decreasing crowding-out, than it was to juice demand through fiscal expansion. These days you have a similar group of personnel in place but a different policy because they’re facing a different situation. Interest rates are incredibly low — nothing is being crowded out.
Meanwhile, the administration has outlined a longer-term plan to bring the deficit to sustainable levels. Those projections might prove wrong. Or that path might prove inadequate. In which case we’ll have to change policies. But there’s no reason to avoid doing what’s necessary for growth now just because in the future we might need to do something different. And it’s worth keeping in mind that a years-long recession would devastate our long-term budgetary picture anyway so it’s not as if there’s a huge short-term tradeoff.