Bond Bubble Watch: More Stimulus On the Way?

If even Japan, which is by now well acclimated to economic stagnation, is breaking open its coffers for a round of government-funded economic stimulation, why can’t the U.S. take another Treasury-funded romp into the private sector?

Such is the question raised today by Bloomberg’s Liz Capo McCormick and Susanne Walker. They contend that, with the price of Treasury securities so high and yields so low, now is a great time for the government to borrow like the dickens.

Meanwhile, on the back of last week’s unpleasant economic indicators, Morgan Stanley today lowered its forecast for second-half U.S. GDP growth, to between 2 and 2.5 percent from between 3 and 3.5 percent: “Instead of punishing the Obama administration for running up a budget deficit the Congressional Budget Office said will total $1.34 trillion this year, bond investors are pouring money into fixed-income assets as inflation slows and equity markets stumble.” With so many buyers lined up to get more bonds from the government, Obama has freedom to incur a lot more debt — freedom Bill Clinton never got.

The just-released August survey conducted by the National Association of Business Economists shows most economists favor job creation over deficit reduction. And Morgan Stanley today lowered its expectations for U.S. GDP growth by a percentage point, to between 2 percent and 2.5 percent. Ben Bernanke has signaled that the Fed is ready to fight deflation. Will the U.S. government step up spending just as the 2009 stiumulus package begins to wind down? It’s a possibility.

Bond Bubble Watch: More Stimulus On the Way?