Brad DeLong wonders why the bond market isn’t punishing the Bush Administration harder for its fiscal sins. He lists a number of possible explanations, including

1. The people who matter in financial markets are expecting either (a) that there will be a Clinton-Democrat (i.e., Eisenhower-Republican) victory in November 2004, or (b) that Stephen Friedman, John Snow, and their allies in Congress will move in early 2005 to eviscerate Karl Rove and the other deficit doves in the Bush administration, and so restore fiscal sanity.
2. There is a genuine bond-market bubble, a bubble which will be unwound sometime in the next year or two with… interesting upward movements in ten-year Treasury bond yields.

I have argued for the bubble view myself. Also, I recommend checking J. Huston McCulloch’s site every six months or so to get a read on the term structure of interest rates.

But I think that Brad may be wrong to say that the fiscal prospects of this country changed with the Bush Administration. The main determinant of the long-term fiscal outlook is the unsustainability of Social Security and Medicare. It is not clear that the probability that those programs will be fixed has fallen with the election of a Republican.

For Discussion. Are long-term interest rates in the United States too low given the fiscal outlook?