M2RB: The Church
Sometimes
when this place gets kind of empty
Sound of
their breath fades with the light
I think
about the loveless fascination
Under the
Milky Way tonight
The Orson Welles’ ‘War of the Worlds’ Paul Krugman Edition Stimulus Programme:
"If we discovered that space aliens were
planning to attack, and we needed a massive build-up to counter the
space alien threat, and inflation and budget deficits took secondary
place to that, this slump would be over in 18 months.”
- Paul Krugman, theorising how a manufactured crisis about how an alien invasion threat would bring a worldwide recovery
By
Greg Mankiw
I
often disagree with Paul Krugman, but I usually understand him. Lately,
however, I have been puzzled about his view of the bond market. In a recent
post, he takes President Obama to task for believing that the failure to deal
with our long-term fiscal imbalance might cause a spike in interest rates:
America can’t run out
of cash (except politically, if Congress refuses to raise the debt ceiling); it basically can’t experience an interest rate
spike unless people see an increased chance of economic recovery and hence a
rise in short-term rates. And the people who have been predicting an interest
rate spike any day now for four years shouldn’t have any credibility at this
point.
But
back in 2003, when the fiscal imbalance was much smaller (It was $377.6 billion – Sophie),
he wrote:
With war looming,
it’s time to be prepared. So last week I switched to a fixed-rate mortgage. It
means higher monthly payments, but I’m
terrified about what will happen to interest rates once financial markets wake
up to the implications of skyrocketing budget deficits….
How will the train
wreck play itself out? Maybe a future administration will use butterfly ballots
to disenfranchise retirees, making it possible to slash Social Security and
Medicare. Or maybe a repentant Rush Limbaugh will lead the drive to raise taxes
on the rich. But my prediction is that
politicians will eventually be tempted to resolve the crisis the way
irresponsible governments usually do: by printing money, both to pay current
bills and to inflate away debt.
And as that
temptation becomes obvious, interest rates
will soar. It won’t happen right away.
With the economy stalling and the stock market plunging, short-term
rates are probably headed down, not up, in the next few months, and mortgage
rates may not have hit bottom yet. But unless we slide into Japanese-style
deflation, there are much higher interest
rates in our future.
I think that the main
thing keeping long-term interest rates low right now is cognitive dissonance.
Even though the business community is starting to get scared — the ultra-establishment Committee for Economic
Development now warns that ”a fiscal crisis threatens our future standard of
living” — investors still can’t believe that the leaders of the United States
are acting like the rulers of a banana republic. But I’ve done the math, and
reached my own conclusions — and I’ve locked in my rate.
I
am having trouble reconciling these points of views. Has Paul changed his mind
since 2003 about how the bond market works? Or are circumstances different now?
If anything, I would have thought that the fiscal situation is more dire now
and so the logic from 2003 would apply with more force. I am puzzled.
Professor
Mankiw asks:
“Or are circumstances
different now?”
Yes,
“the one that we’ve been waiting for” is now in the White House…so, it’s all
good!
Under The Milky Way Tonight - The Church
Sometimes when this
place gets kind of empty
Sound of their breath
fades with the light
I think about the
loveless fascination
Under the Milky Way
tonight
Lower the curtain
down in Memphis
Lower the curtain
down all right
I got no time for
private consultation
Under the Milky Way
tonight
Wish I knew what you
were looking for
Might have known what
you would find
And it's something
quite peculiar
Something that's
shimmering and white
It leads you here
despite your destination
Under the Milky Way
tonight
Under the Milky Way
tonight
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