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For years, allegedly serious people have been issuing dire warnings about the consequences of large budget deficits -- deficits that are overwhelmingly the result of our ongoing economic crisis. In May 2009, Niall Ferguson of Harvard declared that the "tidal wave of debt issuance" would cause U.S. interest rates to soar. In March 2011, Erskine Bowles, the co-chairman of President Barack Obama's ill-fated deficit commission, warned that unless action was taken on the deficit soon, "the markets will devastate us," probably within two years. And so on.
Well, I guess Bowles has a few months left. But a funny thing happened on the way to the predicted fiscal crisis: Instead of soaring, U.S. borrowing costs have fallen to their lowest level in the nation's history. And it's not just America. At this point, every advanced country that borrows in its own currency is able to borrow very cheaply.
The failure of deficits to produce the predicted rise in interest rates is telling us something important about the nature of our economic troubles (and the wisdom, or lack thereof, of the self-appointed guardians of our fiscal virtue). Before I get there, however, let's talk about those low, low borrowing costs -- so low that, in some cases, investors are actually paying governments to hold their money.
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