Ferguson vs. Krugman
Harvard historian Niall Ferguson has had a bit of dispute going with Princeton economist Paul Krugman. The debate centered around interest rates and what would happen with the recent issuance of large amounts of bonds to pay for President Obama’s massive spending plans. Ferguson argued that the new debt would want to drive up interest rates. Prof. Krugman argued the contrary position,
De haut en bas came the patronising response: I belonged to a “Dark Age” of economics. It was “really sad” that my knowledge of the dismal science had not even got up to 1937 (the year after Keynes’s General Theory was published), much less its zenith in 2005 (the year Mr Krugman’s macro-economics textbook appeared). Did I not grasp that the key to the crisis was “a vast excess of desired savings over willing investment”? “We have a global savings glut,” explained Mr Krugman, “which is why there is, in fact, no upward pressure on interest rates.”
But recent developments are lending far more support to Prof. Ferguson’s position,
On Wednesday last week, yields on 10-year US Treasuries — generally seen as the benchmark for long-term interest rates — rose above 3.73 per cent. Once upon a time that would have been considered rather low. But the financial crisis has changed all that: at the end of last year, the yield on the 10-year fell to 2.06 per cent. In other words, long-term rates have risen by 167 basis points in the space of five months. In relative terms, that represents an 81 per cent jump.
Prof. Ferguson goes on,
The policy mistake has already been made — to adopt the fiscal policy of a world war to fight a recession. In the absence of credible commitments to end the chronic US structural deficit, there will be further upward pressure on interest rates, despite the glut of global savings. It was Keynes who noted that “even the most practical man of affairs is usually in the thrall of the ideas of some long-dead economist”. Today the long-dead economist is Keynes, and it is professors of economics, not practical men, who are in thrall to his ideas.
I’d take some exception to that characterization in that I’m not all that big a follower of Keynes. Still, the entire article is well worth reading. The bottom line is that it appears that the bond market participants are looking at the projections for speding, deficits, and national debt for the U.S. and thinking it is too much. That in the end, the U.S. will end up monetizing its debt and printing lots more money and driving up inflation. It is amusing in that I noted both this possibility awhile ago and my pointing out the disquieting nature of projected spending was…well disquieting really annoyed some. Looks like the bond market participants think the projections are more significant than some might like us to think.