Really Bizarre...
Ezra Klein Roasts Evan Bayh

Expand the Supply of Cash-Like Securities!

Ryan Avent

Fiscal policy: Tricky creditors holding out money, waiting to yank it away | The Economist: CRISES in the Middle East and Japan have reinvigorated the flight to safety we observed throughout much of the financial crisis. From early February, the yield on the 10-year Treasury is down about 12%, and it's down 4% since Friday. In the wake of the financial crisis, low yields have been used by defenders of fiscal stimulus to support the argument that America does not face a near-term borrowing crisis and should spend more. Tyler Cowen, seeing the change in yields, turned up the sarcasm.... One can't be sure of Mr Cowen's meaning... but my reading is that he's suggesting it's obvious the decline in yields should not be interpreted as permission to (or justification to) spend more. If I'm wrong, I hope he'll correct me. It seems reasonable, and yet I find myself thinking that Brad DeLong has a point here:

If people thought that government debt was risky, its price would be falling as well. The fact that people are willing to pay more for government debt indicates that it is increasingly valuable--and so we should make more of it.

Surely the fact that American debt securities are considered to be among the safest of assets amid a broad flight to risk should tell us something about American creditworthiness, no? Perhaps we haven't learned that there are fewer bond vigilantes about, but we have learned something about the vulnerability of America's credit position to global shocks, which provides some indication of how much breathing room America has before the vigilantes attack. I'm struggling to understand how one can read an increased willingness to hold American debt as evidence that markets are now more concerned about American borrowing, such that we can now be more confident that current borrowing should be cut. How does Mr Cowen connect those dots?

It also seems clear to me that the answer could be neither a) nor b) but c): panicking markets suddenly have an excess demand for cash and cash-like securities. In this case, whatever the federal government does, central banks should do their best to satisfy the excess demand and prevent cash-hoarding from fueling falling expectations and producing a real economic slowdown.

Note that Federal government bonds are "cash-like securities" that are easily hoarded. Note that normal open market operations do not expand the supply of "cash-like securities"--they simply swap one government short-term asset for another.