Economics

What Paul Krugman Cannot Imagine

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Party for your riot to fight!

Paul Krugman today tries to persuade us that deficit fears are chimerical by invoking an econ-policy "consensus" that does not remotely exist:

For the last few months, I and others have watched, with amazement and horror, the emergence of a consensus in policy circles in favor of immediate fiscal austerity. That is, somehow it has become conventional wisdom that now is the time to slash spending, despite the fact that the world's major economies remain deeply depressed.

While there are certainly many economists who think that spending is dangerously out of control–mostly because spending is dangerously out of control–to posit this a "consensus" in a world where the president of the United States is Barack Obama and the country's most influential econ-policy columnist is Paul Krugman strikes me as more than a bit exaggerated.

But the meat of the Krugger's argument is this:

Bond vigilante

This conventional wisdom isn't based on either evidence or careful analysis. Instead, it rests on what we might charitably call sheer speculation, and less charitably call figments of the policy elite's imagination — specifically, on belief in what I've come to think of as the invisible bond vigilante and the confidence fairy.

Bond vigilantes are investors who pull the plug on governments they perceive as unable or unwilling to pay their debts. Now there's no question that countries can suffer crises of confidence (see Greece, debt of). But what the advocates of austerity claim is that (a) the bond vigilantes are about to attack America, and (b) spending anything more on stimulus will set them off.

What reason do we have to believe that any of this is true? Yes, America has long-run budget problems, but what we do on stimulus over the next couple of years has almost no bearing on our ability to deal with these long-run problems. […]

Nonetheless, every few months we're told that the bond vigilantes have arrived, and we must impose austerity now now now to appease them.

Wave aside the casual insult at the beginning, pause briefly to enjoy that to be sure in graf 2, but then drink deeply from the fount of bubble mentality: It can't happen here, because it hasn't happened here, at least not in recent memory. It is this precise mental pathway–the almost tautologial inability to consider catastrophic or even momentous shifts–that is the ultimate, Murder On the Orient Express-style villain of Michael Lewis' The Big Short. And it's one of the reasons why people like Big Short hero Michael Burry are beginning to suspect that Krugman's eternally safe bond market might be the biggest bubble of them all.

Reason on Krugman here. If you can stomach some bad writing, I predicted the end of the dot-com bubble in spring of 2000, the dollar bubble in spring of 2001, and (sorta) the debt bubble in January 2009.