Friday, August 20, 2010

Mr. K #2

Now that I've dealt with Mr. K #1 (i.e. NK), I can go to Mr. K #2 (i.e. PK). If you are into predicting Krugman behavior, you could probably guess what Krugman would be writing in response to the recent reduction in Treasury yields, and that is today's NYT column.

It's a colorful world that Krugman lives in, peopled by gods, human sacrifices, and vigilantes - something like an Indiana Jones movie. There's Krugman in the hat (former academic doing right for mankind) fighting off snakes and assorted bad guys. The bond vigilantes I have never quite understood. Somehow we're not supposed to care about the views of people who are lending to us (or potentially lending to us). Go figure.

Anyway, here's the opening paragraph:
As I look at what passes for responsible economic policy these days, there’s an analogy that keeps passing through my mind. I know it’s over the top, but here it is anyway: the policy elite — central bankers, finance ministers, politicians who pose as defenders of fiscal virtue — are acting like the priests of some ancient cult, demanding that we engage in human sacrifices to appease the anger of invisible gods.
What a lot of nonsense. Our policymakers are irresponsible, elite, callous bastards, because they won't engage in more intervention? Our central bank just engaged in a huge, risky intervention, which they are reluctant to unwind. There is little more that they can, or should, do. Our federal government is running a large deficit and accumulating debt at a rapid rate. There is risk that we may not return to the long-run growth path that we were on prior to 2000 (see this), and thus our capacity for repaying our debts may be compromised. Why shouldn't we be a little cautious?

PK finishes off with this:
So here’s the question I find myself asking: What will it take to break the hold of this cruel cult on the minds of the policy elite? When, if ever, will we get back to the job of rebuilding the economy?
As usual, anyone arguing against more "stimulus" is a heartless creep. Apparently "rebuilding the economy" involves only the guiding light of the federal government. Again, go figure.

9 comments:

  1. "There is risk that we may not return to the long-run growth path that we were on prior to 2000 (see this), and thus our capacity for repaying our debts may be compromised. Why shouldn't we be a little cautious?"

    Then you should be against making permanent the Bush tax cuts and, given your last post, for a great increase in government spending on education and training. Is that correct?

    And if you're worried about long run growth that's reason for much more government spending on high return investments like education, alternative energy, other infrastructure, basic science, etc., things that economics has long established will be underprovided or poorly provided by the private sector due to externalities, asymmetric information, economies of scale, zero marginal cost of idea/information use, etc., etc.

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  2. Hi Richard,

    1. Sure. I didn't want the Bush tax cuts to start with. Let them expire.

    2. On education and training: depends what it is. It's certainly unfortunate that state governments are tightening up on their higher education budgets.

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  3. "Our central bank just engaged in a huge, risky intervention, which they are reluctant to unwind."

    What a lot of non-sense.

    What is the reason for central bank to exist? What is this intervention? Where is its risk? And what was its benefit?

    Finally, what is the difference between accumulated new 1 trln of debt and 1 trln of Fed liabilities? Well, there is NONE as far as USA is concerned.

    And again if you are worried about long-term growth then how does 10% unemployment fit into this long-term growth prospect? Woundn't this growth be higher if these people were employed and producing value to economy? But, you will say, inflation will result. What is the cost of inflation in terms of lost GDP output per year compared to 10% lost output due to unemployment?

    What a lot non-sense.

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  4. I find the whole situation depressing...

    http://squashpractice.wordpress.com/2010/08/19/depressing-debt-dogma-distills-deflation-dilemma/

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  5. Don't be so depressed. Everything could turn out fine. In any event, it's not boring.

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  6. more stimulus...brings my country (Italy) in a bad situation....20-30y ago we stimulated (well..I wasn't born so it's not my fault eheh) the postive fiscal policy..and..well..you can see what his the result of our choise.

    PK wants to fight against the big running water....with a small running water in the opposite side to it....well..I think the result will be..a bigger running water that will come against us...

    http://ecobusinesspace.blogspot.com/2010/08/positive-fiscal-stimulus-no-thanks.html

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  7. And know many examples where fiscal stimulus did miracles. But of course modern macroeconomy is all about anecdotes and never about objective analysis. Public sector is bad, private sector is good. Judging by the temperature outside it is jut the opposite

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  8. Professor,
    When the US Government issues T-Bills or Bonds, it has nothing to do with "financing" the deficit. These are reserves drains operations. If you do not drain, then excess reserves at the Fed will result. If these excess reserves are not rewarded at the Fed Fund rate, they would cause a plunge in short term interest rates. So issuing T-Bills or Bonds are really reserves draining operations, not "financing" operations. Greece issues bonds to finance its deficit, but a country with its own floating non convertible currency issue bonds or T-Bills to drain reserves so that the target for short term rates is achieved (Krugman does not understand this, but I was hoping that you would...)

    Yields on long dated US Treasury strictly reflect expectations regarding the future levels of short term interest rate as decided by the Fed. It has nothing to do with fears over the solvency of the US Government. The US will never run out of US dollars so it can not possibly become insolvent (Japan will never run out of Japanese Yen either, Canada will never run out of Canadian dollars, the UK will never run out of UK pounds... but Ireland and Greece can run out of EUROs big time just like Argentina ran out of US dollars in the late 1990s). The US Government spend by changing numbers in bank accounts using computers. It will never run out of numbers or computers to mark up your bank account with US dollars.

    The ultimate limit for the size of the US Government deficit are the real resources of the economy (human, energy, etc). If you test this limit, inflation will result. At 10% unemployment, we are nowhere close to this limit for the foreseeable future. This is in fact fully reflected right now by yields on US Treasuries (the 10-year is at 2.6%!).

    Qc (I know... I was not supposed to write again, but I couldn't remain silent on this one)

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  9. "The bond vigilantes I have never quite understood. Somehow we're not supposed to care about the views of people who are lending to us (or potentially lending to us)."
    Krugman has often emphasized the "invisible" part of "invisible bond market vigilantes". He's saying that the bond-market doesn't actually worry about our ability to repay, which is why our bonds sell so much better than those of Greece or Spain.

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