More Smoke and Mirrors From Krugman
In this post Krugman is rolling his eyes over the press making up the fact that people are worried about the US government’s fiscal situation. (The very idea!) He says:
And right now, deficit-phobia has quickly congealed into the latest [Conventional Wisdom]. You can see it in editorials (not from the Times, I’m happy to say, but almost everywhere else), in what the talking heads say, even in supposedly objective news reporting. Not a day goes by without my reading some assertion that “markets are anxious/jittery/worried about the deficit” — an assertion based on no evidence whatsoever. (Long-term interest rates on US debt are near historic lows; CDS spreads show no concern about default.)
So I’m interested in the part I’ve put in bold. If you follow the link, you’ll see that it’s just to the latest quotes of various spreads on credit default swaps, which are basically insurance contracts making you whole in case some institution (like a company or government) defaults on it loan payments.
So the price for 5-year US Treasurys is 21 basis points. I could be mistaken, but I’m pretty sure that means you pay them $21 a year for them to insure you for $10,000 worth of 5-year US Treasurys. (I can’t remember if they just send you $10,000, or if they wait and see what the nature of the “credit event” is and just make you whole.)
So Krugman’s right, the markets “aren’t worried” about a default on US Treasurys in the grand scheme–the spread on 5-year debt issued by Ford is 784 basis points.
But to understand whether the US government’s shenanigans in the last year have made investors jittery, we should look at what the price for insuring against Federal default was before the financial crash.
Check out this Bloomberg article from September 2008:
Sept. 9 (Bloomberg) — The cost of hedging against losses on Treasuries rose to a record on concern the U.S. government faces higher liabilities because of its rescue of mortgage companies Fannie Mae and Freddie Mac, credit-default swaps show.
Contracts on U.S. government debt increased 3.5 basis points to a record 18, up from 6 basis points in April, according to CMA Datavision prices for five-year credit-default swaps at 5 p.m. in London.
So you’re right, Prof. Krugman. The market is only 250% more jittery now than in April 2008. Man I can’t stand these idiotic financial reporters who are inventing worry over the fiscal situation!
[Disclaimer: I never dealt with CDS when I worked in the financial sector; I have only studied them as an aloof academic. So it’s possible I am comparing apples to oranges in the above. But if I had to guess, I’d say Krugman was full of it.]
