As written in the
Grant's Interest
Rate Observer
, the U.S. has 3.3 times more Treasury debt outstanding than a decade ago, yet the yield demanded by the market has fallen by two-thirds, from 6.1% to 2%. The market won't always be so accommodating. Someday, when the market demands higher interest rates or, worse still, refuses to buy new debt at any price, USA situation will quickly get out of hand. Still the problem is different in the Eurozone. Because countries such as the U.S. and Japan are obligated to creditors in their own currencies, they would likely prefer the risk of inflation and possible devaluation of their currencies over the option to default. In the Eurozone, because countries issue debt in a common currency that none of them alone controls, there is no easy way out for one overleveraged country: the only choices are to undergo a restructuring (like Greece); a rescue by the European Central Bank (which, at various points, has been a buyer of sovereign debt issued by Greece, Ireland, Portugal, Italy, and Spain); or withdrawal from the Eurozone and reinstatement of their previous national currency.
James Grant originated the "Current Yield" column in Barron's before founding Grant's Interest Rate Observer in 1983. He is the author of five books, one of which is Mr. Market Miscalculates (Axios Press, 2008).
