Hold your breath

Apparently we're once again moving to the brink of disaster in the credit markets. Krugman tells us not to worry about the plummeting stock market:

Panic about the credit markets instead. Interest rate on 3-month Treasuries at 0.02%; interest rate on high-yield (junk) bonds over 20%.

This is an economic emergency.

If my understanding is correct, the spread between those two numbers indicates how scared investors are that borrowers in the private market (including banks, companies, and you and me) will default. Treasuries are loans to the federal government, and are considered virtually 100% safe (since the government can always tax, borrow, or print money to repay a debt, and will basically never default). Since everyone is "flocking to safety" and loaning to the federal government, the federal government can demand to borrow at very low interest rates and still find a lender. In fact, the federal government can now borrow $100 today and only have to repay a total of $100.02 three months from now!

On the flipside, "junk" bonds--which are considered higher risks for default, and which can only find lenders by offering to borrow at very high interest rates--their interest rates are shooting through the roof. This is because nobody wants to invest in the private markets, because they are afraid that private borrowers will default.

And so a wide gap between those two interest rates indicates people are getting the hell out of the private markets and essentially stuffing their cash under the government's mattress.

Incidentally, while this is all bad news, it also illustrates why federal deficit spending is required in these situations. The government can borrow money for free; now is the time for the government to borrow lots of it and get it spent in the economy, so as to make up for the decrease in consumer spending and keep lots of businesses alive (thus preserving jobs). And of course, this should be done in a constructive way, with spending on things like increased unemployment insurance, infrastructure, financial aid to the states, and tax relief for everyone.

Anyone who talks about balanced budgets right now just doesn't know what they're talking about. Obama needs to run, like, a 500 billion dollar deficit next year.