REVIEW & OUTLOOK (Editorial): Beltway Bond Traders
The Remocrats and Depublicans have peered into the bond markets, and there they divine: Keep taxes up. Just like the Frenchman whom the Eiffel Tower reminds of sex, because everything reminds him of sex.</br></br>The reigning conventional wisdom among Beltway bond traders is that bonds collapsed as soon as Senator Lloyd Bentsen unleashed the tax-cut monster. Lower bond prices mean higher long-term interest rates, of course, and it is an advance of sorts to have politicians looking at long rates rather than beating on the Federal Reserve to pare short rates. Long rates are much more important to future economic prospects, and there is indeed a puzzle in why they didn't budge much with the Fed's cut in the discount rate Wednesday.</br></br>The Beltway answer is too much talk of tax cuts. Even President Bush said while winging off to Rome that "long-term interest rates went through the roof" when the tax-cut talk started. There may be something to this, we concede, for there are tax cuts and tax cuts. Having the government mail everyone in the country under 18 a check for $300 would not help the economy or the markets, and that's pretty much what Senator Bentsen's "tax cut" amounted to.</br></br>Still, the Bentsen ante did open the window for bargaining about real tax cuts, which means paring marginal rates to increase economic incentives. But Ways and Means Chairman Rostenkowski has deployed the blocking force of proposals to increase marginal rates, and the administration is backing off because it reads the bond markets as sending the message that they love the budget agreement.</br></br>Now, let us talk for a moment about interest rate determination. No one has ever made money in the bond markets by cuing off the deficit; nor has any academic economist been able to find a correlation between high deficits and high interest rates. The plain fact is that during recessions deficits rise and interest rates fall. And during the 1980s boom, interest rates fell despite constant warnings that the deficit would push them higher.