I’m beginning to suspect the Republican’s decision to hold the debt ceiling hostage to demand only big cuts in spending and President Obama’s almost enthusiastic desire to play along was a way to deal with the problem of the nonexistent bond vigilantes by actively creating some.
Most of the elites in Washington would love to use this moment of economic downturn and the resulting drop in tax revenue in classic shock doctrine fashion to create deficit hysteria so they can justify cuts in the social safety net that will hurt regular Americans. Cuts to programs such as Social Security, Medicare, Medicaid, and Pell Grants. These are cuts that would normally be unacceptable, but by claiming a crisis, it necessitates a bipartisan grand bargain, and they can act in opposition to the will of the people while avoiding any democratic accountability for their actions.
Their biggest problem is that the bond market refuses to play along by creating a crisis to justify the immediate push for austerity, so our politicians will have to create it.
As Paul Krugman pointed out, despite the Wall Street Journal warning us for three years about the impending attack of bond vigilantes, 10-year bond rates are still down at 3.11 percent.
Here is where holding the debt ceiling vote hostage in this particular negotiation comes into play. If Congress puts off any vote long enough, our politicians could actually make some bond trader modestly nervous, not about any fundamental problems in our economy, but about our political leaders’ willingness to mess around with their bonds for the sake of political showmanship. This could eventually create a modest uptick in bond yields, which the deficit hysterians will then use as their “proof” that the long foretold attack of the bond vigilantes has begun.
When the actual lack of bond vigilantes threatens to ruin our political leaders’ immediate austerity plans, it seems they are prepared to work to create them.