The more I look at Paul Ryan’s recent comments on CNBC, downplaying the odds of a debt deal while claiming bondholders would accept missed payments, the more I am troubled. Not only is his cavalier attitude to a default scary in and of itself, but his justification for it just doesn’t make any sense.
In the interview, Ryan said: “I talk to lots of bond traders. I talk to lots of people like Gross and Druckenmiller and economists. They all say, whatever you do, make sure you get real spending cuts, because you want to make sure that the bondholder has confidence that the government’s gonna be able to pay them.”
Ryan also added: “That’s what I’m hearing from most people, which is, if a bondholder misses a payment for a day or two or three or four, what’s more important, that you’re putting the government in a materially better position to be able to pay their bonds later on.” (Ryan also seemed to be echoed by Sen. Toomey on this point).
But is there really any crisis of confidence among the bondholders? The current yields on 5 and 10 year notes and 30 year bonds are, respectively, 1.84%, 3.17% and 4.29%. For comparison, in late 1999 and 2000 all these yields were above 6% (never mind notes and bonds – on some days in 2000 even the yields on T-bills were more than double the yield on a 10-year note now!).
Back then the budget was balanced, inflation and unemployment were low, and there was an expectation that the country would just continue to party like it’s 1999. Much lower current yields certainly do not suggest any loss of confidence since those good old days.
And why would bondholders be so worried about long term deficit projections anyway? The average maturity of U.S. debt is 5 years, and over 90% of publicly held debt matures within 10 years. Does Ryan really think that “all” or “most” bondholders are seriously concerned that the government may not be able to pay them within the next several years?
And if that’s really so, why does he callously disregard those concerns? His plan does not even begin to reform Medicare for 10 years and does not balance the budget for about 20 years. Furthermore, in the next few years it actually adds more to the national debt than the president’s budget plan and thus puts the government in a materially worse position to be able to pay the bonds that are currently in circulation.
Why would bondholders be reassured by such a plan, let alone welcome a default if it helps to pass that plan?! A bonus question for CNBC: why wasn’t Paul Ryan asked follow-up questions about these glaring contradictions?