One thing seems clear: America’s government is making its economic road harder than it needs to be. Debt problems loom, but there is no immediate fiscal crisis and no need for drastic short-term cuts. When debt issues came up during my trip to China, officials had a consistent message: China is a patient investor. It wants America to take steps toward fiscal sustainability, but it’s happy to have this happen over a 5- to 10-year period. By cutting drastically now, America is undermining its economy for no good reason.
Treasury yields tell the tale; they continue to tumble. The yield on the 10-year Treasury fell below 3% on today’s bad economic news. Treasury yields have fallen on reduced American economic prospects, but they’ve also moved down as part of a broad flight to safety. Trouble in Europe and a slowdown in Asia have made the safe haven of American government debt more attractive. Which makes the tussle over America’s debt ceiling look even more unnecessarily dangerous. The other consistent message from Chinese officials on debt matters was that any failure to make good on American obligations would be catastrophic. Even a very short disruption in payments, of a week or two, would be totally unacceptable.