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.

FILED UNDER: Economics and Business, Government, , , , ,
Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

Comments

  1. odograph says:

    This is another politicized, Presidentialized, retelling.

    It totally ignores that Treasury rates fell to unprecidented lows in an unprecidented flight to quality.

    It also strangely ignores Bernake’s Quantitative Easing plan, in which Bernake (the Fed) has become a purchaser of long-term governemnt debt, in competition with bond investors, bidding up rates.

    It wasn’t surprising that rates would rise as the credit crisis eased, and even less so when the Fed is actively swapping long term debt for short term cash.

  2. steve says:

    I thought that inflation was always on the table as a longer term risk. Short and medium term, there has been more concern about deflation, which many people feared we have no effective tools to combat. In the longer term, inflation was the price paid to insure no deflation and soften the recession.

    Starting off with historically high levels of debt is what makes all of this a gamble and puts us in uncharted waters. It is all just theory. I really, really hope that once the economy stabilizes, we make some serious attempts at reducing our debt. Deficits do matter.

    Steve

  3. odograph says:

    Mr. Ferguson acknoledges that rates are at historic lows:

    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.

    A chart might be instructive. There is one here. That is part of a Calculated Risk story.

    I’m willing to consider this as “inflation” but geez louise, we are coming off the literal historic low.

  4. odograph says:

    Starting off with historically high levels of debt is what makes all of this a gamble and puts us in uncharted waters. It is all just theory. I really, really hope that once the economy stabilizes, we make some serious attempts at reducing our debt. Deficits do matter.

    A lot depends on Bernanke and Geitner knowing what they are doing.

  5. “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.”

    Because the interest rates on government debt have gone up after a period of being insanely low? I probably tend to be more concerned about the long term deficit than most liberals, but this is just the silliest kind of hand wringing. Of course the rates are going to go up if you increase the number of bonds you’re selling, the question is what they go up to, and how that compares to normalized rates. If 3.7% is where we’re topping out now, that’s actually rather fantastic.

  6. Dave Schuler says:

    odograph, whom are you accusing of politicization? Ferguson or Verdon? I think it’s a bum wrap in either case but it would help to know what we should be analyzing before we begin the analysis.

    I don’t see a single mention of political party in Steve’s post. Is it your position that it is impossible for a complaint about President Obama to be anything but politically based?

    I’ve been reading Steve’s work long enough to recognize that he isn’t particularly political. That he might have an ideological bias may, however, be fair comment.

    On the other hand Dr. Krugman’s ideological and political biases are obvious and so integral to his standing as a public intellectual that it’s impossible to argue against him without one’s comments assuming an ideological or political cast however unintended.

    My own skepticism on present policy is founded on my observation that the actual empirical evidence for the real world effectiveness of the Keynesian multiplier is extremely slim. Indeed, my reading of the studies suggests that the deadweight loss tends to overwhelm the actual multiplier effect. However, I’m open to proof but I need real world evidence rather than ceteris paribus models.

    Consequently, I think that leaning more heavily towards measures that would have caused the money to be circulated more quickly would have increased whatever multiplier effect it had. IMO the Administration has too many oars in the water.

    I also don’t find the trompes l’oeil the Administration is promulgating, e.g. “jobs created or saved”, very encouraging but that’s just a quibble.

  7. “Consequently, I think that leaning more heavily towards measures that would have caused the money to be circulated more quickly would have increased whatever multiplier effect it had. IMO the Administration has too many oars in the water.”

    That’s a rather odd notion to have while (I presume) worrying about the inflationary impact of policy.

  8. odograph says:

    odograph, whom are you accusing of politicization? Ferguson or Verdon? I think it’s a bum wrap in either case but it would help to know what we should be analyzing before we begin the analysis.

    It’s getting so I can be confident to tune in and find “Obama’s Deficit” as the new cause for tooth decay:

    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,

    This is geared as “Obama’s massive spending plans” backed by Krugman, but it is really Ferguson vs Bernanke … I wonder why he doesn’t take him on directly.

    For more charts, see the expansion of the Fed balance sheet. From a WSJ story.

    Do we even get above how much of this might be monetary policy at play?

  9. Dave Schuler says:

    Brian:

    I thought that inflationary pressures were more likely to be caused by the size of a fiscal measure rather than its rate of onset. Do you have evidence to the contrary?

    odography:

    How does your response to my question answer my question?

  10. odograph says:

    Note: Obama’s fiscal policy is certainly a factor, but let’s see it balanced, esp. when we worry about inflation(!) with the parallel monetary story.

  11. odograph says:

    Dave, I thought I answered your question, with the quote about “Obama’s massive spending plans” and how I thought it avoided all monetary discussion.

    Does your Q back to me continue that?

  12. Dave Schuler says:

    You answered a question I hadn’t asked about “presidentialization” and responded to neither of my questions about politicization.

  13. odograph says:

    anyone who chooses only a slice of the problem, to stay within their comfort zone, and to target opponents as culprits, is politicizing.

  14. Boyd says:

    Odo, since you continue to not answer Dave’s question while claiming that you have done so, it can only lead the rational person to believe that you don’t want to answer the question.

    Maybe I’m just a little naive, but it seems to me that the question has only four possible answers, none of which have you provided:

    1) Ferguson
    2) Verdon
    3) both
    4) neither

    I think it would be reasonable to expand on any of those answers, but it seems to me that one of them needs to be the basis of an honest response.

  15. Bill H says:

    Has anyone noticed that mortgage ads have disappeared from television?

  16. Dr. Schuler, odograph is playing “The Question is Moot!” Once you understand that you’ll see there’s little point in engaging.

  17. odograph says:

    I think if you add up my answers it’s pretty clear. I think that Ferguson was political when he chose Krugman and not Bernanke (or Geitner) as his foil.

    Krugman is not in charge of the rate curve, the Fed, or the Treasury. The government is not even following any kind of Krugman plan. The government never went as far as Krugman wanted.

    I think Steve V. was political when he echoed Ferguson and repeated his position that it is about “Obama’s massive spending plans”

    The links I gave, if you follow them, will show that such simplifications miss much of the picture.

  18. odograph says:

    Note: It is also Krguman’s analysis that Bernanke’s plan is safe, but Bernanke has published and spoke himself a lot on how he plans to manage inflation as the business cycle turns.

    Ferguson could take that on. Note also that this investment blog thinks its about Bernanke:

    Bond Market to Bernanke: Take Your Foot Off the Accelerator

    http://seekingalpha.com/article/139656-bond-market-to-bernanke-take-your-foot-off-the-accelerator

  19. “I thought that inflationary pressures were more likely to be caused by the size of a fiscal measure rather than its rate of onset. Do you have evidence to the contrary?”

    Well, there’s no particular reason fiscal policy should cause inflation if the debt isn’t monetized.

  20. Steve Verdon says:

    I can see Odo is up to his old tricks.

    The article does in fact reference quantitative easing,

    Credit for averting a second Great Depression should principally go to Fed chairman Ben Bernanke, whose knowledge of the early 1930s banking crisis is second to none, and whose double dose of near-zero short-term rates and quantitative easing — a doubling of the Fed’s balance sheet since September — has averted a pandemic of bank failures. No doubt, too, the $787bn stimulus package is also boosting US GDP this quarter.–emphasis added for those who need to work on reading comprehension

    In short, Odograph didn’t read the link he is bitching so much about.

    The article goes on,

    But the stimulus package only accounts for a part of the massive deficit the US federal government is projected to run this year. Borrowing is forecast to be $1,840bn — equivalent to around half of all federal outlays and 13 per cent of GDP. A deficit this size has not been seen in the US since the second world war. A further $10,000bn will need to be borrowed in the decade ahead, according to the Congressional Budget Office. Even if the White House’s over-optimistic growth forecasts are correct, that will still take the gross federal debt above 100 per cent of GDP by 2017. And this ignores the vast off-balance-sheet liabilities of the Medicare and Social Security systems.

    In other words, it isn’t just quantitative easing or the stimulus that is the problem here, although they are contributing factors. There is the fact that Obama’s spending plans incorporate quite a bit of spending aside from the stimulus and what the Fed is doing. When take together it implies higher inflation.

    Is there any reason to pay anymore attention to Odograph who is either a liar or an ignorant fool?

  21. odograph says:

    Steve, you can re-emphasize your post down here at comment 10, if you think it will save you.

    I’ll just point out again that Steve plays the Drudge card:

    Bond Vigilantes Confront Obama as Housing Falters

    Meanwhile, the investors are over on my emphysis:

    Bond Market to Bernanke: Take Your Foot Off the Accelerator

  22. odograph says:

    Note that 12:27 pm comment tells you the things in his referenced article that he didn’t tell you in his post, because they did not support his “Obama’s massive spending” story line.

    Just now he says:

    In other words, it isn’t just quantitative easing or the stimulus that is the problem here, although they are contributing factors. There is the fact that Obama’s spending plans incorporate quite a bit of spending aside from the stimulus and what the Fed is doing. When take together it implies higher inflation.

    I think that starts sounding like what I said, a fuller and less politicized and Presidentialized view.

  23. Steve Verdon says:

    The seekingalpha article is one man’s interpretation of the situation that ingores all the other spending. I think it is wrong.

    Note that 12:27 pm comment tells you the things in his referenced article that he didn’t tell you in his post, because they did not support his “Obama’s massive spending” story line.

    Right, which is why I told people reading my post to read the entire Fergeson article. Becuase I’m trying to hide that part. Egads, you’ve found me out.

    I think that starts sounding like what I said, a fuller and less politicized and Presidentialized view.

    No. If it was just the stumulus and just the quantitative easing I don’t think we’d see the run up in bond yeilds. At least not to the extent we are seeing. You want to leave out the rest of the trillion dollar deficit this year, the 10 trillion for the next 8 years or so, and the issues with Medicare and Social Security. It isn’t what you are saying, you want to blame it all on monetary policy when it is both. Like I said, go read the article by Ferguson.

  24. odograph says:

    I read Ferguson’s post before you put it up. I’m reading Felix Salmon’s blog, Mark Thoma’s blog, Naked Capitalism, etc. I can’t remember which one “popped” in my reader first, but I saw it there.

    In future Steve, if you want to call me an idiot, find something I’m actually wrong about.

    I never said it was “just the stumulus and just the quantitative easing,” though I think it’s interesting that others rank that portion so highly.

    All I want is a rounded view in the political blogs like OTB. I don’t think they should just pull the old “Obama’s deficit” chestnut out at every opportunity, and leave those other issues to the fine print, in article referenced, but as something not discussed.

    … maybe that’s a little much to ask.

  25. Steve Verdon says:

    I read Ferguson’s post before you put it up.

    So were you lying in your opening post or lying now? If you really did read it, why did your opening comment try to play it that there was no mention of quantitative easing? Why did you fail to note that the linked article mentions the tug of war between fiscal and Monetary policy?

    It also strangely ignores Bernake’s Quantitative Easing plan, in which Bernake (the Fed) has become a purchaser of long-term governemnt debt, in competition with bond investors, bidding up rates.

    You do realize that quantitative easing doesn’t have to mean the Fed buys government debt, right? It is buying government debt because that way there is a guaranteed buyer as opposed to hoping there is a private foreign government to buy the bonds. Given the massive increase in the bond issuance due to the massive increase in the deficit that is indeed a concern. So once again, it is both. Fiscal and monetary policy, and the fear is monetizing the debt.

    I never said it was “just the stumulus and just the quantitative easing,” though I think it’s interesting that others rank that portion so highly.

    You have pointedly ignored the other factors involved. Further, when it is brought up by me you keep accusing me of “presidentializing” it as if President Obama has had absolutely no role at all.

    All I want is a rounded view in the political blogs like OTB.

    I don’t believe you here either.

    I don’t think they should just pull the old “Obama’s deficit” chestnut out at every opportunity, and leave those other issues to the fine print, in article referenced, but as something not discussed.

    But that is just it, yes quantitative easing can lead to inflation, even hyper-inflation, but this is even more so when it is government debt the Fed is buying up vs. other types of debt. It is, in effect, printing money to give to politicians to go play with. Politicians tend to have a rather bad history of being frugal and wise when spending other people’s money.

    I would also point out your intellectual dishonesty when it comes to the seekingalpha article. Lets suppose you are right. I’m focusing too much on Obama’s spending, and not enough on the Fed’s actions. The seekingalpha article though goes in the opposite direction. It doesn’t mention the other spending at all and has no link to an article that it does (unlike me). So in a way it is more biased than I am. Yet you consider that to be accurate. Because it fits with your view of the situation. If we assume all of the above you are just as much of a dishonest hack as I am.

    My actual view is that it is the whole situation. Fiscal and monetary policy are getting into an area that could be very bad if something isn’t done. I don’t think it is wise that the Fed simply not buy gov’t debt. However, Obama could reign in his grandiose schemes to re-assure bond markets that he is aware of the issue…much like Clinton had to do back during his tenure as President.

  26. Steve Verdon says:

    I’ll just point out again that Steve plays the Drudge card:

    Bond Vigilantes Confront Obama as Housing Falters

    Oh and just to point yet again Odograph’s less that stellar record at getting the facts right. That was not my title (Bond Vigilantes), nor was it Drudge’s title. It was the title of the Bloomberg article. I’ve already explained why I linked to it, which Odograph omitts here (sauce for the goose Odograph…two can play this game). And the term Bond Vigilantes is not even a Bloomberg creation, but goes back to 1984.

    “The bond-market vigilantes are up in arms over the outlook for the federal deficit,” said Edward Yardeni, who coined the term in 1984 to describe investors who protest monetary or fiscal policies they consider inflationary by selling bonds. He now heads Yardeni Research Inc. in Great Neck, New York. “Ten trillion dollars over the next 10 years is just an indication that Washington is really out of control and that there is no fiscal discipline whatsoever.”

    Must be a Right-wing Republican stooge.

    However, Clinton had a similar incident with bnd markets, and James Carville has been quoted as saying,

    Clinton political adviser James Carville said at the time that “I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.”

    To Odograph it was a quick hit piece on Obama. In actuality what started out as a post on an unusual article pointed out the problems Obama is going to run into unless he reconsiders his spendthrift ways.

  27. Drew says:

    LOL

    odo, you’ve dug yourself about a 20 foot deep hole.

    Throw the shovel away……

  28. odograph says:

    So were you lying in your opening post or lying now? If you really did read it, why did your opening comment try to play it that there was no mention of quantitative easing? Why did you fail to note that the linked article mentions the tug of war between fiscal and Monetary policy?

    Don’t move the goalposts .. unless, wait, that’s all you have. Spin spin spin.

    Drew, read it again. What I said about Steve’s original post was true. He just shifted at the last minute to my position, and then claims he’s ahead of me in having it.

    It’s amazing how many times he pulls this stunt, and how the skimmers fall for it.

    This is what Steve wrote in his original post, and not what was buried in his referenced articles:

    The bottom line is that it appears that the bond market participants are looking at the projections for [spending], 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.

    The bottom line for “bond market participants” was “[spending], deficits, and national debt” … except when it wasn’t … except when Steve moves his position.

  29. Drew says:

    ……..25 feet deep….30 feet

    But look on the bright side. You’ll have big shoulders when all is done…..

  30. Steve Verdon says:

    No goal posts have moved, I linked approvingly to an article by Niall Ferguson and my only real dispute was the claim that all economists are slaves to Keynes. I largely agreed with the rest of his analysis. There wouldn’t be the problem if it weren’t for the massive spending increases.

    Or do you really think Bernanke should have the Fed not buy all that debt and lets see if the bond market can absorb it all….and if not take the rather nasty fall out?

  31. odograph says:

    No goal posts have moved, I linked approvingly to an article by Niall Ferguson and my only real dispute was the claim that all economists are slaves to Keynes. I largely agreed with the rest of his analysis. There wouldn’t be the problem if it weren’t for the massive spending increases.

    Literally there wouldn’t be a problem? The Fed balance sheet itself has no risk to bond-holders or to future inflation?

    Or do you really think Bernanke should have the Fed not buy all that debt and lets see if the bond market can absorb it all….and if not take the rather nasty fall out?

    I think that Bernanke’s plan has about half our risk, the other half is the government debt. I think Obama’s game plan, like Bernanke’s, relies on a lot of things happening just right.

  32. odograph says:

    Or do you really think Bernanke should have the Fed not buy all that debt and lets see if the bond market can absorb it all….and if not take the rather nasty fall out?

    BTW, note on what was bought:

    In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months.

    Most was apparently agency-backed MBS rather than purely financing “debt.”