Another week, another public-policy adventure — but the political theater is nothing compared to the hysterics in the bond market.

The 10-year T-note in the three days after Nov. 12 leaped from the 2.5 percent area of the prior three months to 2.96 percent. This week, again in three days, 10-year Treasurys shot to 3.27 percent. A three-quarter-percent jump in less than one month is a big deal, especially as mortgages have done the same, jabbing a hole in housing’s life raft.

The first leg of the jump was routine and natural: Bonds were overbought in expectation of a double-dip recession, and in hopes that the Fed’s QE2 (a second round of quantitative easing) would force rates down.

This week’s second jump was the direct result of the tax-cut-extension deal, which re-ignited a blazing mental fur ball of deficits, inflation, money-printing and we’re-all-going-to-hell-in-10-seconds-or-less worry.

How much of this is justifiable concern, how much is hand-wringing, and how much is markets having a lucrative time running cattle back and forth … all of that begins and ends with the economy, stupid.

Which is going nowhere. In an economic version of the movie "Groundhog Day," we’re right back where we were last year, the choir insisting that we’re in recovery. We are not. We are growing at an achingly slow and fragile pace, but not recovering: not jobs, not housing, not households. That soggy mass cannot kindle inflation.

But what about the stimulus from this new tax-cut deal? It is gratifying to see President Obama move to the center, although meeting on the poor ground of competitive giveaway: If you guys want to give money to rich folks, then I get to give some to my team.

Nothing in this temporary deal is an impediment to the long-term Big Fix that we so desperately need, and for which prospects are rising.

The essence of this week’s deal: the (U.S. House Speaker Nancy) Pelosi and (Sarah) Palin wings have suddenly moved from gridlock anchors to irrelevant margins. Both lost this week.

Parties that can make a big deal with each other will make more deals. To the genuine credit of both parties, the estate tax festering for 10 years also got fixed this week, and on fair terms.

However, contrary to the panic in the bond market, there is no serious stimulus in the tax-cut/payroll/jobless benefits package! Everything is as-has-been. Yes, we’ll borrow another $750 billion over two years, but we were going to do most of that anyway.

The only new element, the 2 percent cut in payroll tax, will be mostly saved, not spent, just like all of the mini-checks in the mail since Jimmy Carter’s first $50 bucks in ’77.

The real stimulus enacted in 2009 is now washing out — especially support for state and local budgets. As austerity really hits there, we may see half a million people laid off in the next year, and large-scale contraction in pension and benefit promises.

This surge in long rates does more to undermine recovery than the tax-cut deal will do to help. That problem is driving the Fed nuts: It has tried for three years to get long-term rates low enough to stimulate asset recovery (not inflation), but the whole herky-jerky decline from 5.25 percent 10-year Treasurys in 2007 has trailed the economy. Still does.

External forces — economic heat in Asia and Northern Europe — have helped us: Our exports are up, pulling manufacturing, and some 65 percent of the S&P 500’s gorgeous earnings are from overseas.

However, in Europe all roads lead to slowdown, whether austerity in the "Club Med" nations, or default, or euro currency break-up. The hyperproductive Northern Europe is enjoying a grossly undervalued euro temporarily, delivered only by Club Med pain and market panic. Inevitably, a much more expensive currency and exports lie ahead for Germany and its immediate neighbors.

Asia has great growth momentum and long-term prospects, but its currency manipulations are near an end as inevitable as Europe’s, with Asian domestic inflation rising out of control right now. Asia will slow itself down or markets will do the work.

There will be a day for self-sustaining recovery here, and inflation risk, but this is still not that day.

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