ECONOMIC THEORY is clear about one thing: increase the supply of a good and, other things being equal, its price will fall. So the U.S. government massively increased the supply of its bonds in order to finance its deficits, and their price . . . rose. (When bond prices rise, their yields, or interest rates, fall.) When the government was running surpluses of some $200 billion in 2000, retiring bonds and reducing their supply, the interest rates on 10-year Treasury bonds was above 6 percent. Last week, when President Bush sent to Congress a budget projecting a deficit for fiscal 2007 of well over $400 billion, portending a further increase in the issuance of Treasury IOUs, the yield on 10-year bonds was not higher, but lower–around 4.5 percent.

Fortunately for economists, this performance only seems to stand economic theory on its head. The explanation of this apparent flying-in-the-face of theory is that the “other things” that economists hold “equal” when they forecast such variables as interest rates aren’t equal at all.