FacebookTwitterGoogle+RedditEmail

Séance on Wall Street

There is a long history of mediums who claim to communicate with the dead. They sell their services to people anxious to talk to relatives or great figures of the past. Such exercises can be dismissed as harmless entertainment – people spend a few dollars to be treated to tall tales.

There is a Wall Street equivalent to these séances. People who claim to be knowledgeable about financial markets tell policy makers and reporters what the financial markets are thinking about current policy. These Wall Street seers claim to interpret events in financial markets for those of use who are less familiar with the mysteries of market movements.

In recent weeks, the Wall Street seers have been spinning stories about how the financial markets are very worried over the U.S. budget deficit. They have told us that the markets are concerned about the government’s ability to repay its debt. The seers tell us that the markets may soon demand much higher interest rates, if the government does not get its deficit under control.

The seers tell us that the government must take steps to rein in the budget deficits projected for the future by cutting back Medicare and Social Security. They also warn us about the risks of adding to the deficit with health care reform. And, the seers tell us that we certainly should not try to tackle the problem of 25 million unemployed or underemployed workers with another big round of stimulus. That would make the financial markets very angry.

Those of us who were not born with the gift of being able to communicate with financial markets cannot directly evaluate the information that the financial markets are passing on to the Wall Street seers. However, we can easily determine the risk that investors assign to holding long-term U.S. government debt. This requires looking at interest rates.

Interest rates appear to be directly contradicting the seers’ assertions about financial markets. The interest rate on 10-year Treasury bonds is currently near 3.5 percent. The interest rate is not determined by people rattling off their visions about future debt defaults; it is determined by investors putting their money on the line.

These investors are willing to hold hundreds of billions of dollars in long-term government debt at a return of just 3.5 percent. By contrast, they demanded a return of more than 5.0 percent in 2000, back when the U.S. government was running a large budget surplus. If there is widespread fear in financial markets of a default on government debt, it is difficult to understand why investors would be willing to hold it at such a low rate of return. Usually investors demand high returns for holding risky assets.

In addition to interest rates, we could evaluate the seers’ assessment by trying to carry through other implications of the bad news debt default scenario. Presumably, the stock market would be headed downwards with the financial sector stocks leading the way. After all, a default on U.S. government debt would be cataclysmic for the U.S. economy and especially for the banks who hold trillions of dollars in government debt or government-backed debt.

Here also the news doesn’t seem to fit the seers’ vision. The markets have been rallying lately, and many financial stocks are doing quite well.

One piece of evidence that these seers have occasionally used to support their case is the fact that the price of credit default swaps on U.S. debt have risen. Credit default swaps (CDS) are in effect insurance against default. If the price of this insurance rises, then presumably the markets judge default to be a more likely event. That is the reason that people in their 60s pay more for life insurance than people in their 20s.

There is one problem with this story. The payoff of a CDS depends not only on the default but also – as those who did business with AIG know – the ability of the counter-party to pay. What is the likelihood that J.P. Morgan, Goldman Sachs, or anyone else will be left standing in a world where the U.S. government has defaulted on its debt? It’s not clear what the price of CDS issued on U.S. government bonds means, but it is not a straightforward assessment of the probability of default on the government’s debt.

It should not be surprising that the vision of the Wall Street seers seem to be far from reality. After all, their crystal balls could not see the $8 trillion housing bubble, the collapse of which has wrecked the economy.

In fact, the self-proclaimed seers are using their visions to try to discourage the public from supporting policies that the seers don’t like. These people want to see cutbacks in Social Security, Medicare, and other social programs. They are more concerned that higher deficits could mean higher taxes on the wealthy at some point in the future than they are about the tens of millions of unemployed or under-employed today.

In short, those who want fantastic stories about the unknowable would be much better off visiting the people who promise to communicate with the dead than listening to the Wall Street spokespeople. They will learn more and be associating with people of greater integrity.

DEAN BAKER is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy.

This column was originally published by The Guardian.

 

 

 

 

 

 

 

 

More articles by:

Dean Baker is the senior economist at the Center for Economic and Policy Research in Washington, DC. 

February 21, 2019
Nick Pemberton
Israel, Venezuela and Nationalism In The Neoliberal Era
Chris Orlet
The Bill and Melinda Gates’ Fair Taxation Scaremongering Tour
Bruce E. Levine
“Heavy Drinking” and the NYT’s Offensive Obit on Herbert Fingarette
Lisi Krall
This Historical Moment Demands Transformation of Our Institutions. The Green New Deal Won’t Do That
Stephanie Savell
Mapping the American War on Terror: Now in 80 Countries
Daniel Warner
New York, New York: a Resounding Victory for New York Over Amazon
Russell Mokhiber
With Monsanto and Glyphosate on the Run AAAS Revokes Award to Scientists Whose Studies Led to Ban on Weedkiller in Sri Lanka and Other Countries
Jesse Jackson
Trump’s Fake National Emergency Moves America Closer to an Autocracy
Alex Campbell
Tracing the Threads in Venezuela: Humanitarian Aid
Jonah Raskin
Mitchel Cohen Takes on Global and Local Goliaths: Profile of a Lifelong Multi-Movement Organizer
Binoy Kampmark
Size Matters: the Demise of the Airbus A380
Elliot Sperber
For Your Children (or: Dead Ahead)
February 20, 2019
Anthony DiMaggio
Withdrawal Pains and Syrian Civil War: An Analysis of U.S. Media Discourse
Charles Pierson
When Saudi Arabia Gets the Bomb
Doug Johnson Hatlem
“Electability” is Real (Unless Married with the Junk Science of Ideological Spectrum Analysis)
Kenneth Surin
The Atlantic Coast Pipeline: Another Boondoggle in Virginia
John Feffer
The Psychology of the Wall
Dean Baker
Modern Monetary Theory and Taxing the Rich
Russell Mokhiber
Citizens Arrested Calling Out Manchin on Rockwool
George Ochenski
Unconstitutional Power Grabs
Michael T. Klare
War With China? It’s Already Under Way
Thomas Knapp
The Real Emergency Isn’t About the Wall, It’s About the Separation of Powers
Manuel García, Jr.
Two Worlds
Daniel Warner
The Martin Ennals and Victorian Prize Winners Contrast with Australia’s Policies against Human Dignity
Norman Solomon
What the Bernie Sanders 2020 Campaign Means for Progressives
Dan Corjescu
2020 Vision: A Strategy of Courage
Matthew Johnson
Why Protest Trump When We Can Impeach Him?
William A. Cohn
Something New and Something Old: a Story Still Being Told
Bill Martin
The Fourth Hypothesis: the Present Juncture of the Trump Clarification and the Watershed Moment on the Washington Mall
February 19, 2019
Richard Falk – Daniel Falcone
Troublesome Possibilities: The Left and Tulsi Gabbard
Patrick Cockburn
She Didn’t Start the Fire: Why Attack the ISIS Bride?
Evaggelos Vallianatos
Literature and Theater During War: Why Euripides Still Matters
Maximilian Werner
The Night of Terror: Wyoming Game and Fish’s Latest Attempt to Close the Book on the Mark Uptain Tragedy
Conn Hallinan
Erdogan is Destined for Another Rebuke in Turkey
Nyla Ali Khan
Politics of Jammu and Kashmir: The Only Viable Way is Forward
Mark Ashwill
On the Outside Looking In: an American in Vietnam
Joyce Nelson
Sir Richard Branson’s Venezuelan-Border PR Stunt
Ron Jacobs
Day of Remembrance and the Music of Anthony Brown        
Cesar Chelala
Women’s Critical Role in Saving the Environment
February 18, 2019
Paul Street
31 Actual National Emergencies
Robert Fisk
What Happened to the Remains of Khashoggi’s Predecessor?
David Mattson
When Grizzly Bears Go Bad: Constructions of Victimhood and Blame
Julian Vigo
USMCA’s Outsourcing of Free Speech to Big Tech
George Wuerthner
How the BLM Serves the West’s Welfare Ranchers
Christopher Fons
The Crimes of Elliot Abrams
FacebookTwitterGoogle+RedditEmail