Instability

There are two very nice debt porn posts out in the blogosphere today. Stephen Meister argues that since much of our $14T debt is held by Social Security, we essentially owe that money to ourselves so it kind of doesn't count. Things aren't as bad as they seem. Yet.

The Calafia Beach Pundit thinks that the end of QEII is a good thing for free market reasons.

In short, instead of worrying about the end of monetary "stimulus" and fiscal "stimulus," we should be cheering. Misguided stimulus is bad; ending it is therefore good. The economy is struggling under the weight of too much "stimulus," and it needs a break.

In response to them, I offer this chart from yesterday:

This is what it looks like when people decide you aren't going to pay them back. Source.
Greece and Ireland and Portugal obeyed the standard economic models until a few months ago. Now they're simply deadbeats on the run from their creditors.

As a private citizen, you can borrow money on your home, your credit card, your paycheck and who knows what else. Up until the first debt collector calls you, there are all kinds of models and spreadsheets and budget programs that can convince you things are going to be OK. After that first call and your first series of late payments, those models and charts and equations don't mean anything. In the case of a government, once bondholders decide they aren't going to get their money back, they flee.

See chart above.

Economic models are great when things are relatively stable, but gargantuan debts relative to your income make things highly unstable. In the Calafia Beach Pundit's post above, I left this in the comments.

My problem with the end of QEII is not interest rates but volume. Just who is going to buy $100B of Treasuries every single month? Every month is going to be a rollercoaster with ups and downs driven by random world events. The volume of the debt will make the system unstable and investors panicky.

I don't think QEII was actually instituted to keep interest rates low, I think it was instituted because the Treasury got cold sweats wondering who was going to buy endless cataracts of debt and with good reason. Keynesian economics is stable until it's not and compassionate nations all around the world are finding this out.