Bloomberg News has an article cheerleading for more government spending. It begins, "The bond market is giving President Barack Obama the green light to spend more money to boost the faltering economy." It goes on, "Obama has the bond market on his side as he heads into midterm congressional elections":
With inflation so low, "fiscal-policy restraint is not a virtue, but a deflationary vice," Paul McCulley, a managing director at Pacific Investment Management Co., which runs the world's biggest bond fund, wrote in a report posted on the Newport Beach, California-based firm's website on Aug. 13.
Mark me down as skeptical of this whole line of analysis. For one thing, even if one agrees with the assessment of current market sentiment, markets can change rapidly. If and when that green light turns red, it could get ugly quickly. For another thing, the mere ability to borrow at low interest rates doesn't necessarily make spending a good decision for the borrower, as all those homeowners and investment banks who levered up in 2006 or 2007 could tell you. It depends on what you are spending the money on. Maybe private borrowers could use the money more efficiently than Uncle Sam can use it, or maybe the taxpayers who will eventually pay off the debts could use the money better than the politicians borrowing and spending on their behalf.
