Time to Stick the Knife In

OK, time to stick the knife in.

In two recent posts, "Remarkably Naïve" and "Economists: Wrong Again," I derided claims by Paul Krugman and other economists with a dilettante's knowledge of how financial markets work that low yields on U.S. government bonds "can be seen as validation of Washington's aggressive policy of spending and borrowing to 'rescue' the crisis-hit U.S. economy."

For another (almost real time) example of the spuriousness of such logic, I present the following snippet from a report in today's New York Times, "Dubai Debt Woes Raise Fear of Wider Problem" [italics mine]:

For now, most of the pain from Dubai is being felt by the holders of the Islamic bonds of Nakheel, the developer owned by Dubai World that is known for the palm-themed islands it built.

On Dec. 14, $3.52 billion in Nakheel bonds come due. One of the largest Islamic group of bonds issued, the deal was snapped up by Western and regional investors. In a reflection of how sure investors were that Dubai would meet these payments, the bonds were trading at a 10 percent premium to face value earlier this week. They are now trading at around half of face value.

For the sake of your fellow men (and women), l kindly request that economists -- Nobel prize winners or otherwise -- keep their ignorance about financial markets (and whatever other ivory tower nonsense about how the world works they've acquired through the years) to themselves.

Comments

[gaius marius]

at the considerable risk of propagating theoretical nonsense....

hamilton observes the critical aspect of krugman's argument -- so long as the real rate of growth exceeds the real borrowing cost government will always see revenues outgrow deficits. see post-ww2, etc.

moreover i think its far from clear that the government even needs to sell debt externally to finance spending -- this is in some manner a gold-standard convention perhaps antiquated by modern monetary dynamics. with excess capacity over 30% and 17% underemployment, the idea that a wage-price spiral will take hold seems very farfetched indeed regardless of how much monetization takes place. i think the fed could print a quadrillion right now but the banks simply have nowhere to lend it within the country (in aggregate) to create actual monetary expansion -- which is why they're piling into treasuries as MP well notes. and should inflation pop up with large excess reserves in place -- either economic or speculative asset -- what is to prevent the raising of reserve requirements to neutralize bank balance sheet potental? indeed i'm not quite sure i see what the limit on government spending is, or if in fact there is any nearby short of full employment or other economic capacity limits.

what's going on in dubai seems very much a CRE collapse, with defaulting debt in the sovereign penumbra similar to FNM/FRE debt. this kind of thing becomes possible for governments and societies when they borrow in currencies other than the one they issue -- but that's not true for the united states. if for example FNM were to default, the fed could tender all the trillions of outstanding of dollar-denominated FNM obligations at par (or perhaps 97 cents to ameliorate moral hazard) and 'finance' the purchase with excess reserves. again, if the excess appears troublesome, raise reserve requirements. for FNM to actually default, it would require an elective act of political will to cause it to fail.

i realize all this is quite theoretical and has as little chance of actual implementation as did keynes' ideas did in 1929 -- but the mechanism seems very workable. MP, i'm particularly interested in your deeply experienced perspective on minsky/chartalist ideas.

(sorry -- i accidentally posted parts of this comment elsewhewre on the site as well.)

[Donlast]

Why government's raising gargantuan amounts of debt to finance government spending must be a Good Thing quite baffles me. Government spending is inefficient, misallocates resources and wealth, is sub-optimal and creates a myriad of new long-term claims on State funds. In recent jobs reports one sees that new jobs are being created but where? Education and health care. Who in his right mind would counsel new teachers and health care workers in the current state of the US economy which urgently needs people who can create tradeable goods? Playing with aggregates is so easy and appears to be so masterly. Its a pity those who spout about government spending don't exercise more grey cells on what is actually the micro effect of that spending, in all its infinite and diverse variety. But that would be dismissed as impossible. Exactly. Better blissful ignorance than real intellectual rigour.

[roger]

Scientific philosophy tells you , that if you don't accept
the facts you are stupid,Religious philosophy tells you
that if you are not a believer you end up cooking in hell
for eternity.Poor Krugman,I still like him,at least he has a
conscience,its more than I can say for the Von Mises crowd.

[gaius marius]

i don't think anyone, donlast, would argue that unsolicited private sector spending would be better. if you can think of a way to get it, we'd likely all be happy to hear it. but the reality is that bank credit to the private sector and private sector spending are chasing each other down as balance sheet recession dynamics take hold. massive government deficit spending is the only thing holding up incomes and prices to the extent that they have not collapsed.

arguing that the quality of spending is reason not to spend at this point seems to me rather like arguing that the quality of buckets is reason not to bail as the ship sinks. i don't think anyone likes the quality, but it's what we've got. the alternative is a deflationary spiral of incomes, deposits and prices down to impoverishment.

[Groty]

What makes Krugman so dangerous is he KNOWS what he's spewing is nonsense. He KNOWS the Federal Reserve is the big gorilla in the Treasury and MBS markets creating artificial pricing and yields. Yet for ideological reasons he wants people to believe the ultra low treasury yields are the result of effective Keynesian "borrow and spend" fiscal policy rather than quantitative easing (i.e., an ultra loose monetary policy).

How can any reaonable person not see that the Federal Reserves's interventions in the treasury and MBS markets are creating distorted prices/yields, and that when the FED finally steps away, a new equillibriun of hihger yields will result?

How can a Nobel award winning Princeton economist not see it too?

He can. But he's an ideologue pushing his ideology. That's why he's dangerous.

[Jaxn 44]

Saying Krugman has a conscience more than Mises is is why everyone in this country needs a lesson in LOGIC. Krugman supports the financial elite (FED), unconstitutional money, and with that....the great divide of rich and poor that comes with ALL big government in ALL cases throughout history. He is a believer that government helps us.....when big government is what our Founding Fathers feared above foreign standing armies. Mises represents economic freedom without the government deciding what is good for you. Krugman = slavery while Mises = Freedom.....maybe you won't get the handouts from the Krugman theories...but with Mises you'll have a job, low taxation and sound currency....so you won't need one. If you think I'm wrong go out a put all your money in U.S. bonds and dollars and let every stimulus and money printing extravaganza rob you of everything you ever worked for....me...I'll stick with agriculture and precious metals....the same precious metals that are called MONEY in the Constitution.

[roger]

I agree we all need to improve our thinking.
for me, logic is an oversimplification of the nature
of existence,it does not enter into the essential
interconnectedness and evolution of phenomena.
Aristotle was the father of such thinking, a big step
forward in those days, to day for me at least, it borders
on metaphysical thinking.

[Tom]

Roger, the "Von Mises crowd", as you put it, does have a conscience. That is why they point out the obvious. If you saw someone going down a river in a canoe and you knew it was going over a waterfall, wouldn't you feel it was the right thing to do to let them know?