The 10-year yield is 4.67% with $40 trillion debt, similar to 4.63% in 2007 when debt was $7 trillion. That market signal challenges balanced budget orthodoxy, according to arguments from the late Cato co-founder Ed Crane.
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The national debt stands at $39 trillion and will soon reach $40 trillion, George Will wrote. The yield on 10-year Treasuries is 4.67%. In 2007, when the debt was $7 trillion, the yield was 4.63%.
This comparison undercuts a central claim of balanced budget advocates, according to a line of argument from the late Cato Institute co-founder Ed Crane. Crane argued that a balanced budget amendment would not limit the size of government. It would only constrain the deficit, leaving the government free to spend at whatever level the amendment's revenue cap allowed.
He would ask proponents whether they preferred a balanced $6 trillion budget or a $3 trillion budget with a $500 billion deficit. Many chose the balanced option, missing the point that the smaller budget was the real prize. Crane's point was that government spending itself is the true tax. How the government funds that spending matters far less than the total amount consumed from the economy. A balanced budget amendment, by focusing attention on the deficit rather than the spending level, could enable a larger government than would otherwise exist.
The current bond market data supports Crane's logic. If the market expected a fiscal crisis from $40 trillion in debt, yields would be higher than they were at $7 trillion. They are not. The market's confidence in future revenues reflects expectations of revenue growth, Crane would argue.
Modern libertarians who revive balanced budget calls often ignore this market signal. They treat the $40 trillion debt as a looming crisis. The bond market disagrees.
For stocks like Apple (AAPL), the signal from Treasuries suggests that the discount rate applied to future earnings will remain low, supporting price multiples.
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