Record demand for US debt leads some to call for more government borrowing

With demand for U.S. debt reaching record levels, analysts and officials say it’s tough to predict when Treasury securities might stop being attractive to investors.

Observers cite low interest rates as one of the several reasons why Treasuries have been in high demand in 2011 despite the slow U.S. recovery.

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One of the biggest factors is the fiscal unrest in Europe, which shows no signs of easing. The U.S. looks like a safe investment in comparison, analysts say, even though the nation suffered its first-ever credit downgrade from Standard & Poor's in August.

“In the land of the blind, the one-eyed man is king,” said Jim Kessler, a co-founder of Third Way, the centrist Democratic group.

Bloomberg reported this week that longer-run Treasuries had their best year since 1995, during President Clinton’s first term and Newt Gingrich’s first year as House Speaker.

Treasury securities also continued a good year-end run on Friday, and turned out to be a better investment for 2011 than even gold or oil.

Meanwhile, across the Atlantic Ocean, the spreading debt crisis is now threatening Italy, which has the world’s eighth-biggest economy.

With all that in mind, Steve Bell of the Bipartisan Policy Center says the demand for U.S. debt could be elevated for another 18 months to two years.

But while projections vary, analysts do say Treasuries will eventually stop being as popular. Because of that, said Kessler, a former aide to Sen. Charles Schumer (D-N.Y.), policymakers need to keep a close eye on the markets.

“When the climate changes, it happens fast,” Kessler told The Hill, pointing to Italy’s topsy-turvy sale of its debt this week.  

In the meantime, the demand for Treasuries makes it easier for the U.S. government to finance its debt. 

By and large, analysts and officials on Capitol Hill also say they do not believe that the demand for American debt will have an outsized impact on the deficit-reduction debate.

More liberal economists like Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities, say that the markets are signaling that the government should borrow more, in order to invest in areas like infrastructure, education and scientific research.

But Bernstein is also afraid that some officials pushing for debt reduction aren’t listening.

“The focus on deficit reduction is absolutely warranted in the longer-term, but policymakers seriously misunderstand the dynamics in play here,” said Bernstein, who served as chief economist for Vice President Biden.

“Temporary measures are not what’s driving our medium- or long-term budget deficit,” Bernstein said. “The market is shouting for them to do the right thing. But I’m pessimistic they’ll follow through.”

Bob Bixby of the Concord Coalition also pointed out that both Republicans and Democrats have proposed offsets to recent measures aimed at stimulating the economy.

Senate Democrats, for instance, proposed a surtax on millionaires to pay for President Obama’s jobs package. During the payroll tax debate, congressional Republicans proposed extending a freeze on federal pay to pay for an extension.

“You just don’t hear much of a case being made now for borrowing more,” Bixby said.

Bixby and Bell, both deficit hawks, also noted that the U.S. is currently borrowing largely to fund present consumption and entitlements — and not to invest in areas like infrastructure.

But both analysts also say there is a concern that, if it remains easy for the U.S. to borrow, policymakers might postpone difficult budget decisions.

“I think 2012 is going to be a lost year — 2011 on steroids,” said Bell, a longtime aide to former Sen. Pete Domenici (R-N.M.). “In a bad way. Nothing is going to get done.”