The U.S. had been leading a global movement of fiscal irresponsibility, and now bond traders are telling everyone that time’s up.
U.S. Treasury bond yields have been rising. This could be partially in reaction to erratic U.S. trade policy or manifestly irresponsible U.S. fiscal policy, both of which are deserving of markets’ skepticism. But bond yields for other rich countries’ sovereign debt have been rising simultaneously.
“From the US to Japan, long-term borrowing costs for the world’s biggest economies have surged as investors question the ability of governments to cover massive budget deficits,” Bloomberg reported on Thursday. The article mentions that yields on 30-year bonds for the U.K., Germany, Japan, and Australia have been rising in tandem with Treasuries.
“Investors are warning that governments can’t keep borrowing at the pace they did when interest rates were close to zero,” the article says, “particularly since trade tensions and sticky inflation have diminished the probability that policymakers will dramatically ease monetary policy.”
This speaks to a larger change in global conditions above and beyond anything President Trump or Congress is doing. And it should be a wake-up call for policymakers around the world.
The U.S. national debt is a testament to American policymakers’ recklessness. But the U.S. was also leading a global movement of debt-laden fiscal policy. The conventional wisdom post–Great Recession was that it would be stupid for governments not to spend with interest rates near zero. Free money, and all that.
Interest rates stopped being near zero in 2022, but huge budget deficits continued. The problem with economic theories of government spending is often that they are divorced from political realities of interest groups and elected officials’ incentives.
The classic case of this is the textbook Keynesian theory of economic stabilization: budget deficits in bad times to boost demand and budget surpluses in good times to mop up excess. It makes some sense on paper, and maybe could work out okay if economists made fiscal policy. But politicians make fiscal policy, and they want to hand out goodies in politically advantageous ways in good times and bad times. On top of that, an aging population means growth in entitlement spending regardless of the business cycle. And sure enough, the government runs budget deficits all the time, not just in bad times.
A different version of this was the 2010s’ enthusiasm for spending because interest rates were low. Sure, it might make sense to take advantage of borrowing at near-zero nominal rates and negative real rates in isolation. But government spending creates dependency among constituencies who benefit from the spending. Those constituencies don’t particularly care whether interest rates are low or high. They just see benefits and want to keep them coming, and they’ll organize to elect politicians to make that happen.
Now the interest rates are higher, and nobody wants to tell anyone that it’s time to be more responsible — except, perhaps shockingly, the governments of Greece and Argentina, which are running budget surpluses. President Javier Milei in Argentina is a rock singer/libertarian economist, and Prime Minister Kyriakos Mitsotakis in Greece is a boring anti-populist technocrat, but they both looked carefully at their own countries’ economic histories and won elections on turning things around, which voters understood and accepted would include slashing budget deficits.
No politicians in the world’s largest economies have done that yet. Trump’s talk of paying down the debt was always absurd. He said he would do it by drilling for more oil (which has nothing to do with it), while also saying he wouldn’t reform entitlement programs (which has everything to do with it). Republicans’ reconciliation bill will not meaningfully change the trajectory of the debt, which is to be expected from a party that removed any references to deficit reduction from its platform in 2024.
The federal budget was insane before now, but there was allowance for insanity due to low interest rates. Those are gone, so only the insanity remains. Markets have realized this, and politicians have not, but markets have a way of making politicians realize things sooner or later.