Who is going to solve the debt problem - the bond vigilantes?

 

The US government deficits are not going away regardless of who is elected president. If there is an economic slowdown, the deficits will increase at the very least because of automatic stabilizers. If there is normal growth but plans for either higher spending or tax cuts are passed, the deficit will increase. 

There is no plan to solve this imbalance problem, and no one really wants to talk about it. The only solution is that the markets will have to send a signal that it has enough Treasuries, yet that signal is unlikely to be sent, nor will it be heard. 

We would like to believe that bond vigilantes will impose market discipline, yet the activities of central banks make it harder for large private buyers to impose their will on the bond market. The Fed can change its QT sales. The Treasury can continue to fund short-term. If the rest of the world is in slowdown and the dollar is stable, money will move into Treasuries. The wake-up call may be coming, but the process of how it will happen is still unclear.