MarketWatch: Since Nixon\u2019s \u201cabomination\u201d\u009d as you call it, we have had some periods where government spending to GDP actually went down, like during the Clinton era. Doesn\u2019t that show it\u2019s just the choices made by Congress rather than the Fed to blame [for the problem of rising national debt as a % of GDP]?<\/p>\n
Stockman: There is the issue that Congress ultimately is the fiscal authority. But my argument is, when the Fed becomes a massive buyer of bonds and debt and artificially suppresses interest rate below market-clearing levels, it\u2019s a terrible signal to the Congress that debt is cheap, that running deficits is a viable strategy. So therefore they are induced to kick the can, to let it drift and avoid hard choices. Who wants to tell the public you are going to take your broccoli of higher taxes and lower benefits and spending if you can issue debt on a three-year basis for 40 basis points. That\u2019s free. I was in Congress, they don\u2019t do decimal math, OK? And they think the money is free, it\u2019s a bad problem philosophically, we shouldn\u2019t be doing this for the great long run, but it\u2019s no harm today.<\/p>\n
Then they have professors like Krugman who give them the disingenuous advice that the bond vigilantes don\u2019t care. The market is saying, \u201cfine with us, we don\u2019t care, keep piling the debt on, we love it.\u201d\u009d That is so much baloney. The reason the interest rate on the 10-year bond 10_YEAR -0.33% today is 1.8% or whatever it happened to settle today, is the market knows the Fed is buying half of the debt and is front running the Fed. And it is renting the bond on repo, 98 cents on the dollar, based on overnight money that\u2019s free thanks to Bubbles Ben as well.<\/p>\n