WE NEED HIGHER DEFICITS:

Where Did All the Long Bonds Go? (Rich Miller and Laura Cohn, 2/17/05, Business Week)

Is there a worldwide shortage of long bonds? It may seem like an odd question to ask when a host of governments -- from the U.S. to Britain to Japan -- are running huge budget deficits. But it's one that the financial markets increasingly are debating. [...]

Behind the sudden popularity of long bonds are changes, actual and prospective, in regulations governing pension funds aimed at shoring up their finances and protecting retiree benefits. Those modifications are prompting pension plans to step up their long-bond purchases to more closely match the maturity of their assets to their longer-dated liabilities. The rule changes started in Britain two years ago, spread to the Netherlands, and now may be heading to the U.S.

On Jan. 10, the Bush Administration proposed a wide-ranging plan for reforming the way the $1.8 trillion private-pension fund industry operates, including the elimination of a host of regulations that have allowed the funds to legally underestimate the size of their liabilities. If approved by Congress, the reforms could prove to be a bonanza for the bond market.

When the Bush Administration put forward similar proposals some two years ago, the Committee on Investment of Employee Benefit Assets surveyed its pension-fund members to see how the proposed changes would affect them. The bottom line: As much as $650 billion of pension-fund assets could be shifted out of U.S. equities into long-term bonds.

That's what you get when you combine aging populations and just one trustworthy economy in the world. The global economic system would be destabilized if we did away with our deficit.

Posted by Orrin Judd at February 17, 2005 10:47 AM