The Flight to Quality and U.S. Debt

Writing in the Washington Post, reporter Neil Irwin looks at the fears of a U.S. debt crisis:

It is the Beltway vs. the bond market, and they can't both be right.

The conventional wisdom is that the U.S. can't sustain its current debt levels:

Among economic commentators, there have been rumblings that the debt crisis that started in Greece and increasingly affects such other Western European countries as Spain and Ireland could eventually spread into a crisis of confidence in United States government debt.
So far, the opposite has happened.

The 10 year Treasury rate closed Friday at 3.31 percent, down 41 basis points in May alone, and down 1.54 percent from the beginning of the year. The 10 year rate is not an arbitrary number set by the Treasury Department; it represents the rate investors are willing to pay. The dropping U.S. rate results from what is commonly called a flight to quality.

Expressions of concern about deficit spending can be found in the media every day, but overall government spending is roughly flat, as federal stimulus spending is offset by cuts in state and local budgets. The Bureau of Economic Analysis reports "a larger decrease in state and local government spending" as a factor slowing GDP growth in its revised first quarter GDP report.

In short, long term budget concerns are not affecting the government's ability to borrow money. Comparisons to Europe, particularly Greece, do not point to the U.S. being next in line to have trouble financing its debt, but instead show U.S. debt to be the market's favorite place to park money in a turbulent world.