Clintonomics is useful as a last resort. Akin to war.
At issue are two concepts since the Standard and Poors (S&P) downgrade of US debt on Friday, August 05, 2011: risk free rate of return and relative rate of return. In theory and in practice all government bonds, no matter to which country they belong, are always risk free. Investors always get their money back because governments print money. Investors need not worry because the Fed committed itself to running the printing presses through mid-2013.
Rates of return on US bonds could rise because their risk relative to bonds of other countries and other investments has risen after the S&P downgrade. US bonds are safe but could secularly, on a downward slope, become less safe over time, ceteris paribus.
There are two other concepts to consider: risk premium or yield and opportunity cost. The buyers of US Treasuries, domestic and foreign, are incurring an opportunity cost by deciding to invest cash in US Treasuries (moving from the money market to the bond market) instead of elsewhere. Risk premium or yield plus the purchase price of a fixed income asset must equal the opportunity cost of the investor.
Real rate of return is another important concept. Inflation expectations are buried in yields when adjusted for inflation. Inflation expectations, ideally being zero, make inflation a necessary component of the risk premium.
Nominally, therefore, all bonds are risk free. In real terms, however, there is no risk free instrument. The issue is not investor psychology, though in philosophical terms when reflecting on the system construction of economic science it is all perception.
Clintonomists can, this time around, run down the United States to change the country just as they did Eurasia and Latin America in the ‘90s, and again the eurozone now.
Wall Street Christmas will be as usual, Jesus, the work of God, expensive wines and all, but for the administration of domestic “shock doctrine” on Constitution Avenue, the Main Street of the United States, by the bulls raging on Wall Street for bears to prowl elsewhere in the country, because neither American investors nor foreigners have any appetite for America’s financial antics, neither domestic nor foreign.
The shock and awe of the coming swarm of the locusts, as the Germans have called Wall Street, will be played alongside the fireworks of East River as the crystal ball drops on Time Square on New Year’s eve if the government does not pay attention to the failing grade it received on economic management only to get its act together after further carnage of the US debt and the dollar.
US Treasuries can no longer be talked up. They must be walked up by freezing all further borrowing for the next decade. Dodd-Frank must be reformed and the United States needs the Federal Reserve to also serve as an investment bank.
(My comments in the American Economic Association, AEA, Linkedin discussion of Snehal Manjrekar with Vichet Sum as a contributor in response to a New York Times article constitute this piece).