NCPA - National Center for Policy Analysis

Is a Recession the Pay-off of Paying Off the National Debt?

February 9, 2000

Under President Clinton's budget projections the debt held by the public would be eliminated by 2013. Only one portion of the debt would be paid off -- the gross federal debt would still rise as Social Security IOUs continue to pile up. But is it really worth taking more than $2.5 trillion more out of the American taxpayers' pockets -- over and above what is needed to pay for government functions over the next dozen years?

The bond market is already registering a strong note of caution.

  • Last week, the Treasury Department announced that it was scaling back sales of 30-year bonds.
  • Bond traders panicked as demand for the few available 30-year bonds quickly exceeded supply, causing prices to surge.
  • The interest rate on the Treasury's benchmark bond fell so sharply that the yield curve became inverted.
  • That means that yields on shorter-term securities, such as 2-year notes, were higher than those on the long bond.

Banks and other lenders borrow short and lend long, making a profit on the margin. When borrowing costs suddenly exceed what they can make lending, it becomes much more difficult for home buyers and businesses to get loans. The result often is a recession. Thus inverted yield curves are viewed by economists as harbingers of an economic slowdown.

The bond market also shows a continuing demand for Treasury securities, which are the only ones with no risk of default. And, since the Federal Reserve conducts monetary policy exclusively by buying and selling Treasury bonds, without a large, deep market of such securities, the Fed will be severely hampered.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, February 9, 2000.


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