by Tyler Cowen
on July 1, 2011 at 12:50 pm
1. The economics of the NBA lockout.
2. Do migrants improve their hometowns through remittances?
3. Yet where are the bond market vigilantes? Few people invoke this concept consistently. Explaining such apparent tensions is exactly why every columnist should have a blog.
4. China fact of the day.
5. Left-wingers love graduate school, conservatives do not as much (pdf).
5. Does the fact that people write like this…
the proposition that such a tendency cannot be explained away by variables unrelated to occupational reputation
…in their abstracts have something to do with it?
Re: #5…It strikes me as odd that sociologists are just considering this now. I’m surprised that article warranted a plug.
1. I think they could really benefit from a “franchise” tag like the NFL’s, both for parity and for the fans.
2. Interesting, I would also be interested to see this study applied to the Phillipines which iirc has the largest remittances of any country.
3. Apparently they’re narrative-dependent villains, much like corporate jets.
5. I suspect a nontrivial public-sector worker effect. My own postgrad years were probably the time I was most conservative.
Re: #3 Just because you believe that the bond market might react negatively to political gridlock resulting in missing legally scheduled payments, does not mean that you can’t think that QE wasn’t artificially keeping yields low and that the size of the debt and deficit will not have an impact on yields in the near term. The latter opinion is based on the assumption that while the market views the debt and deficit as large, it believes that the US has the political and economic resources to tackle it long term. The former might indicate that that assumption is inaccurate. It doesn’t seem that logically inconsistent to me, particularly when you consider that the vast majority of people who think not raising the limit won’t do anything (aka some Republicans) have been the most obnoxious when invoking the bond vigilante story over the past few years. That strikes me as more inconsistent.
Here is the thing, bond buyers aren’t dumbasses. I think they realize that the Republicans are not pushing the envelope just for giggles, but to reinforce the long-term financial foundation of the government.
Not to mention they know that the Feds are going to stop paying just about everything else before they stop paying interest.
The whole debt-limit default scare is a red herring. What Krugman is really opposed to is spending cuts.
Bond buyers may not be dumbasses, but you seem to be saying that they don’t think the Republicans are dumbasses, at least when it comes to the debt ceiling.
You apparently don’t think so, but there are those who differ.
The bond buyers aren’t real people (any more). The Fed buys bonds through various intermediaries (e.g. BoA) in order to keep rates low and the debt financed. Or do you really think the world is shoving $4-5 trillion worth of savings every year (worldwide) into government bonds of various stripes? There’s only about $US one trillion of savings to go around, thus any lack of bond market collapse must necessarily be the result of monetization or else money flowing out of other areas (which is not happening).
but you seem to be saying that they don’t think the Republicans are dumbasses, at least when it comes to the debt ceiling.
It’s really that the bond market seems to be saying that they don’t think that the Republicans are dumbasses, at least when it comes to the debt ceiling. The bond market has shrugged off the debt ceiling worries.
Of course, it may be the case that the bond market’s views shouldn’t be trusted on this, but it raises the question of why the bond market should be trusted on inflation far in the future but not a debt ceiling limit that’s coming up in a month.
Shouldn’t someone be up there betting in favor of a debt ceiling problem and default?
Just because you believe that the bond market might react negatively to political gridlock resulting in missing legally scheduled payments
This isn’t the objection, Paul. I think we all agree that the bond market would react negatively to political gridlock resulting in missing legally scheduled payments. The question is, why haven’t rates already risen some in anticipation of this? Isn’t this even a near-term term thing than inflation supposedly coming from the deficits and stimulus?
If Krugman can argue that the lack of rates going up proves that we have nothing to fear about inflation from the stimulus, deficits, etc., then it only makes sense to argue that the same lack of rates going up proves that the debt ceiling rhetoric is overblown for one reason or another. (Not necessarily that missing a payment wouldn’t be bad, just that Krugman et al. are overestimating the chances of that happening.)
There is perhaps room for a sophisticated argument explaining why the interest rates can be trusted on the one subject but not the other, but as Tyler notes, Krugman has not really attempted to explain that.
If Krugman can argue that the lack of rates going up proves that we have nothing to fear about inflation from the stimulus, deficits, etc., then it only makes sense to argue that the same lack of rates going up proves that the debt ceiling rhetoric is overblown for one reason or another.
Isn’t the most obvious possibility here, that rates are not particularly determined by future expectations beyond some short timeframe?
Oh, yes, sure. But in the case of the debt ceiling, the short timeframe is a little more than a month away, whereas the concerns about inflation and so on are considerably more than a month away. So if you take that stance, it seems odd to say, a la Krugman, that the current lack of increase in interest rates proves that there’s no inflationary risk from the deficit, etc., but think that there’s a huge risk from the debt ceiling despite what he’s already described as no increase in rates.
By a measure of timeframe alone, the debt ceiling is coming soon.
I have not followed Krugman well enough to confirm that he says that a functional bond market implies there will be no inflation, but if he says that he’s probably wrong.
More likely, at some point the bond market fails badly, and THEN we an explanation why bond traders were temporarily rewarded for behaving perversely. And we hear that experts have been warning us that the crisis was coming for the last 5 years, or the last 10 years. And it will be apparent that one of the reasons nobody paid the slightest attention to those experts was that the bond markets went 5 years or 10 years without any obvious crisis, while those same experts kept repeating that it was going to fail. Their advice was not timely. Anyone who had paid attention to their warning would have missed out on 5 years or 10 years of profits as well as missing the crash. A good warning would let investors get out of the market 2 weeks before the crash.
Anyway, suppose somebody expected a bond crisis or big inflation. What should he do? He could sell his bonds and leave his money as cash? He could invest in the stock market? Invest in real estate? Buy gold and bury it in the ground?
But probably most of the gold available to be buried in your backyard has already been sold and buried. The people who do that are not going to sell for dollars at any price, short of personal catastrophe.
Is there really any better choice than leave it as bonds and hope?
Well, there’s investing in foreign stock markets. But they mostly don’t have the reporting requirements that US companies do. You could wind up with something like Enron or Citibank. And there’s investing in foreign currencies. You could switch to euros or zlotys.
If you had 1/3 of your money in bonds and you were worried about the debt ceiling and inflation, what would you do now?
The debt ceiling limit is just over a month away. The “we’ll reach too high a debt level and hit a tipping point that will cause borrowing costs to explode” argument is years away. So if anything, the timeframe argument alone argues against Krugman’s position.
Like I said, there is a room for an argument along the lines of “the bond markets are better at dealing with numbers like government revenue and debt projections than reading the minds of politicians,” and maybe that’s what Krugman would say, but he isn’t even addressing the issue.
Re: John Thacker
I don’t think I’m entirely sure what you’re arguing here, but you seem to be arguing that since Krugman argues that low interest rates should assuage fears of the risks of deficits in the near term that that implies that he must by default argue that low rates should also imply that the chances of missing a payment are very small as well. I don’t see how this is inconsistent with his column. It specifically states that one of the consequences of not raising the debt ceiling would be disrupting payments on existing debt which we agree could have negative consequences. It says nothing about the probability of this happening rather that is a dangerous game to play and frankly the emphasis in the column is more on the negative effect of the severe government contraction that not raising the debt limit would require.
In general though I don’t see how it’s inconceivable that rates would stay low in the face of a potential debt ceiling issue. No one believes it will happen, but if it does markets will react accordingly.
You’ve summarized the argument (which is also Tyler’s argument) fairly well.
It says nothing about the probability of this happening rather that is a dangerous game to play and frankly the emphasis in the column is more on the negative effect of the severe government contraction that not raising the debt limit would require.
Actually, I’d argue that the existence of the article and what he writes does say something about the probability of it happening. You wouldn’t write such an article about a horrible risk that had no chance of happening, and his tone and article seems to suggest that it might happen.
No one believes it will happen, but if it does markets will react accordingly.
OK, but many people making the anti-debt argument expressly say, “Sure, you can borrow a ton without increasing interest rates, but then you cross some point of debt as a percentage as GDP or whatever, and a financial crisis is triggered.” Krugman is pointing to interest rates now as a sign that this worry is unnecessary. He’s arguing in the case of the deficits and debts that the low interest rates demonstrate that our debt is nowhere near too high a level of GDP that would trigger a crisis. But don’t financial crises for excessive debts start suddenly as well? No one believes that they’ll happen, but then they suddenly do and the markets react accordingly and interest rates shoot up.
To me that’s inconsistent.. He’s dismissing one type of fear of an unpredictable, low probability crisis by pointing to current interest rates, but hyping another, even though the latter has a sooner definite trigger date.
5. Well, yeah, dogs bite men all the time.
Tyler should read before posting. From the paper:
“interest in abstract ideas” was responsible for the entirety of this effect [to decide to go on to graduate school]. It is not liberals that love graduate school, it is those that self-identify as ‘interested in abstract ideas’. The authors also conclude from the data: “on average liberals are more likely to conceive of themselves as intellectually minded”.
Meet our future overlords: the interested-in-abstract-ideas. OMG.
so who was the first mover?
re#5: It’s a 50 page empirical paper, we can take away 5 pages for introduction/references/conclusion
and yet only 8 pages of data related discussion – so, 37 pages of talk.
not to mention the selection bias here.
I thought the same thing. This paper could have/should have been 15 pages. In sociology, do people really want you to have this high of a fluff to data ratio?
#5: It seems obvious that liberalism would correlate with higher education. It shouldn’t be lost on readers, however, that largely conservative, industry-friendly theories of economics are overrepresented just the same. For all the talk of leftism in academia, wherever they have socialist conclusions, they are ineffective in the media and the career politicians / finance sectors. Conversely, economic-liberal policies, and economic-centrist policies, are widely applauded in academia and these policies are effective in those fields. This centrism, mind you, is just as applicable to corporate structures of accumulated capital as it is to the bureaucratic-regulatory agencies which seek their own rent.
Here’s my theory, it’s kind of like guns, everyone wants guns, but noone wants the other guy to have guns. Everyone thinks their field is too complex and nuanced to be managed centrally, but the other guy’s field is either simple enough to be managed centrally, or scary enough that we NEED it to be managed centrally.
“The Fear of Freedom” anyone?
Pretty close, although I’m more concerned with things like standardizing on yellow corn which leaves agriculture very unrobust. There’s a literature on everything, as they say.
Andrew I have leftist friends who are all for Government regulating more in all industries except the one that they work in. One particular friend is a big advocate of more regulations and government action in health care, finance and energy and the environment but he used to work for a railroad and he can tell you how various government action messed up the railroads. He sees no conflict, in other areas he expects Government programs to mostly work out well.
If private market activity and centralized government have both failed us, are you prepared for an alternative model – such as decentralized, public control?
To treat the left oriented pro interventionist policies of mainstream economics actors as “centrist” is only to identify how far left most of the rest of social science is. Delong and Krugman are not centrists.
I won’t comment on Delong and Krugman but today’s conservatives seem to have shifted wide right over the past twenty years. Guys like Chaffee, Specter, Kemp, Jeffers and Gilchrest have been replaced by Bachmann, Beohner, Inhofe, Palin and McConnell. The new breed is anti-science, anti-intellectual and focused issues like abortion, Jesus and Obama’s birth certificate.
That’s so bogus. It actually helps to see just how Krugman’s own article contradicts this theory. He says that Bush raised the debt ceiling many times but still back in 2004 he called Bush the worst president ever and argued that Republicans were so radical that Democrats would be the only solution to control our budget. We got the ‘Democrat wave’ of 2006 and nothing changed. Now that we have Republicans trying to control the budget he says that Republicans don’t care about anything else and our best hope is to get more Democrats so they can raise the debt ceiling without tough negotiations.
At the same time, Krugman ‘forgets’ that Democrats controlled congress for a large part of Obama’s term and they did nothing, zero, to avoid the financial problems we have now. They can’t even get a budget approved and Krugman says nothing about it! It is impossible to take this guy seriously.
Come on! Krugman favor deficits during economic crisis, which is what is going on with US right now. Back to 2004, he could be in favor of a more controled budget…
Unconvincing, why should economists always be in favor of the same policies when conditions change?
Someone who believed Krugman might simply retort that Bush’s policy was inappropriate for his economic conditions, and deficit spending is appropriate for current conditions.
My point is that Krugman is playing political games here – he is actually going through pains in saying that deficits are not near the ‘too high’ level now (hence the whole bond vigilante storyline) and if that is the parameter he judges what is wrong and what is right he should have used that parameter back when Bush was raising the debt ceiling. Or are bond vigilantes only important when you are in a crisis? I don’t think so.
Filed Under Things I Don’t Understand:
Isn’t the Easing part of Quantitative Easing supposed to be lower interest rates? Aren’t people excited that easing has worked because interest rates are low? Why did we do QE2 if we didn’t think it would keep rates low?
My understanding is that it’s more complicated than that. True, the Fed buying bonds puts downward pressure on rates, but on the other hand they are increasing the money supply and raising inflation expectations which puts upward pressure on rates. Rates have risen since the beginning of QE2.
I also have a theory which I have no data to back up which is that because the Fed announced they would purchase all these bonds China was pushed to the sidelines in the US bond market (at least somewhat) due to the fact that the Fed has been buying bonds, which would have also put upward pressure on rates. Why would China want to get in a bidding war over bonds which the Fed has already announced it is determined to buy? This would explain Bill Gross’ mistake in worrying that nobody would be around to buy bonds after the Fed stopped purchasing 70% of them. The point being that China has been intentionally waiting out QE2 but will likely re-enter the bond market as of, well, today.
If anyone can tell me why that theory doesn’t hold water I’d appreciate the input.
Anyway, I think the Easing part of QE is not lower rates but easier money in the sense that there is more money around, which should raise not lower rates. To understand this seeming paradox is to think in terms of the arrow of causation: more money -> more demand -> expected higher prices for goods & services -> less demand for bonds. Interest rates in this case are an effect of easier money not the a cause of it.
Why would China want to get in a bidding war over bonds which the Fed has already announced it is determined to buy? This would explain Bill Gross’ mistake in worrying that nobody would be around to buy bonds after the Fed stopped purchasing 70% of them. The point being that China has been intentionally waiting out QE2 but will likely re-enter the bond market as of, well, today.
I’d say your theory is plausible.
However, there is the question whether China will want to start buying bonds again. Maybe they have thought it over and decided they don’t want to. Maybe it was easier for them to keep doing it, requiring no change in policy and no new decision, than to start it up again after they have stopped.
“Never interrupt your enemy while he is making a mistake.” Napoleon.
We interrupted China while they were buying bonds, and now they might choose not to start that up again.
I wish someone would explain to me this sports league CBA stuff. It all seems to make little sense. The NFLPA decertifies yet it is apparently negotiating with the NFL owners. How can this be. Don’t you give up your collective bargaining rights when you decertify? Also, why do the players in the NBA want to be in a union at all. Wouldn’t they be better off to ply their trade in a free market? The owners can’t resist overspending so why give them antitrust protection?
As a libertarian, I can’t stand this process. Indeed, why can’t the owners and players pursue their own self interest individually.
To answer your question, collective bargaining does instill some certainty. I’d imagine that most players don’t trust the owners and fear they would collude against them. A collective bargaining agreement gives the players a guaranteed percentage of total revenue.
It just seems weird to me to have a union where every member is a unique professional with individual high priced representation who, notwithstanding the union, separately negotiates an employment contract.
Interesting that gold is down over 1% today while equities are up over 1%. When’s the last time that happened? Could it be because today, the first day after QE2, China has switched their strategy from buying precious metals to buying US bonds, as I predicted here: http://thecandidefund.wordpress.com/2011/04/21/treasuries-silver-china/
Bond vigilantism during the recent past may have been muted by the Fed buying bonds amounting to 104% of the Treasury’s total bond issuance during QE2. Going forward, we shall see.
Yes, we shall see. However, if the stock market keeps rallying like it did this week it may be difficult to distinguish vigilantism from growth expectations. The bond and stock markets have stayed in pretty good sync the past 3 months. But if yields were to rise while stocks fall I’d say that might be vigilantism.
There have been attempts at bond vigilantism. They have just failed.
Krugman: And the 10-year rate, although up a bit from its recent lows on optimism about the Greek austerity vote (why?), is still below 3.2%.
In just one working week (from Monday June 27 to Friday July 1), the rate jumped from 2.85% to 3.2%, or roughly an increase by 12%. That’s more than “a bit”. Krugman is crying victory “a bit” prematurely.
And when the debt ceiling is finally raised, there will be a damburst of catch-up funding to do, making up for lost time. That won’t help matters.
It makes me think rich liberal democracies accumulate demosclerotic rentseeking habits and pick low low-hanging fruit until even zero interest rates no longer stimulate much growth.
I’m thinking maybe QE failed because lenders are rational. All that money stopped at the lenders, so we got no growth, little inflation. If the lenders are wrong, those that lent more would be doing better and others would follow. OTOH we may have to save a while more before lending looks like a better bet. We might see a dam-burst inflation effect if the economy does turn around.
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