Low Treasury Yields Don't Mean We Can Ignore Deficit

The yield on the three-month Treasury hit zero percent briefly. This indicates caution and or pessimism on the part of investors.

The NYT article Investors Buy U.S. Debt at Zero Yield has this comment:

If there is a silver lining to the Treasury market’s gyrations, it is that the United States can borrow money more cheaply from investors, whether they be the governments of China or Japan, or big fund managers. That could help Washington finance various programs intended to revive the ailing economy.

This silver lining is obvious to anyone with plans for a big stimulus package. We should be careful about anything that increases the structural budget deficit because if inflation shoots up, which I suspect it will, these Treasury yields will shoot up too. It will kill the politicians’ plans of tax cuts and new spending programs.

I would suggest the Treasury sell lots of long-term bonds to lock in on these rates, but the Fed is working on a program to drive down long-term rates. It doesn’t make much sense to have the Treasury and the Fed fighting each other.

I am loathe to support any stimulus package, but since the Fed can’t do much more in the area of monetary policy, maybe it’s right to try a fiscal policy solution (i.e. stimulus = borrowing money). We just have to remember in a few years when the economic cycle turns around to do an anti-stimulus in the form of new taxes to retire the debt we’re taking on. I don’t think that will happen, so we need to be judicious with any fiscal stimulus.