All this talk about how borrowing costs are so low that Washington couldn’t possibly be facing any sort of a debt crisis – that the 3.2 percent yield on the ten-year note is somehow a vote of confidence in policies coming out of the nation’s capitol – makes me think that, just as the insane fixation on a low consumer price index was a major contributor to the financial crisis, signals coming from U.S. debt markets are being similarly misinterpreted today and this may ultimately lead to an even bigger crisis in our not-too-distant future.

Misreading what these indicators are saying – or simply reading into them  what one wants to believe instead – has led to bad policymaking before and is likely to do so again.

Perhaps sooner than anyone might think…

For a good example of this, one has only to look back to the middle of the last decade when the housing market was booming and economists across the land marveled at how the Federal Reserve had not only tamed the business cycle and kept prices low, but made nearly every homeowner wealthy to boot!

The central bank’s fixation on the green light being emitted by the consumer price index (and then, unbelievably, fear of deflation in 2002-2003 as home prices were rising at 10 or 15 percent a year) blinded policymakers to the flashing red light of an asset bubble that would meet its pin a few years later.

Similarly, the eagerness demonstrated by many elected officials in Washington to keep making that national debt clock spin faster and higher (with the blessing of most economists) while marveling at how little it costs to keep paying interest on the $13+ trillion tab could be setting the stage for a vicious cycle of sharply higher borrowing costs and even higher deficits.

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