Ceteris Paribus

Ceteris paribus is a Latin phrase meaning all else equal.  It is a term economists use a lot to signify that a cause/effect relationship will take a particular form holding all other things constant.

Here is an example of an analysis that does NOT employ the ceteris paribus logic.  Nobel Prize winner Professor Paul Krugman (part-time Princeton Professor, and full-time devout progressive columnist for the New York Times) purports to have evidence that the bond market does not have expectations of the U.S. becoming overloaded with debt (he is a BIG supporter of more stimulus spending).  His evidence...the U.S. 10-year Treasury yield spiked from 3.67% to 3.9% in a matter of a few days.  But, then the rate decreased back to 3.65%...ergo, no debt fears.

This might be good evidence that the bond market is not particularly afraid of U.S. debt.  After all, the demand is relatively high to send rates back down (the price of a bond an it's yield move in opposite directions).  But consider what else was going on in the world at that time.  Greece has been in a death spiral with yields on their bonds skyrocketing to over 20%.  Europe has been dragging its feet on what, if anything, to do about Greece.  All of this means money has been flowing out of European markets looking for a safer place...  That means more money is flowing into U.S. bond markets, driving up the price of U.S. bonds and driving down yields.

So, it is not that the bond market does not fear U.S. debt.  It's that it fears U.S. debt less than European debt.  In a ceteris paribus world, Professor Krugman's simplistic analysis of the bond market would make sense.  But I would have hoped he would be smarter than that and understand we live in a world where factors are changing and take those changes into account.  At present, I see no reason to conclude that the world does not fear U.S. debt.  My conclusion right now is that we are just the lesser of a lot of evils when it comes to sovereign debt.  Make no mistake, though.  What is happening now in Europe will be arriving at our shores soon if we do nothing with a minimum effect of significantly higher borrowing costs.