Krugman: Interest rates - the phantom menace (re: "surprising and damaging deficit squeamishness")

[Kurt_and_Hunter]

Paul Krugman November 20, 2009, 11:44 am

Interest rates: the phantom menace

From various bat squeaks I’ve put together a view of what I think lies behind the surprising — and damaging — deficit squeamishness of the Obama administration. So here’s what I think they’re thinking — and why it’s wrong-headed. (Fairly wonkish stuff after the jump).

On the face of it, there’s no reason to be worried about interest rates on US debt. Despite large deficits, the Federal government is able to borrow cheaply, at rates that are up from the early post-Lehman period, when market were pricing in a substantial probability of a second Great Depression, but well below the pre-crisis levels:



Underlying these low rates is, in turn, the fact that overall borrowing by the nonfinancial sector hasn’t risen: the surge in government borrowing has in fact, less than offset a plunge in private borrowing.

So what’s the problem?

Well, what I hear is that officials don’t trust the demand for long-term government debt, because they see it as driven by a “carry trade”: financial players borrowing cheap money short-term, and using it to buy long-term bonds. They fear that the whole thing could evaporate if long-term rates start to rise, imposing capital losses on the people doing the carry trade; this could, they believe, drive rates way up, even though this possibility doesn’t seem to be priced in by the market.

What’s wrong with this picture?

First of all, what would things look like if the debt situation were perfectly OK? The answer, it seems to me, is that it would look just like what we’re seeing.

--- snip --- please read the whole thing at link ---

And one last point: I just don’t think the inner circle gets how much danger we’re in from another vicious circle, one that’s real, not hypothetical. The longer high unemployment drags on, the greater the odds that crazy people will win big in the midterm elections — dooming us to economic policy failure on a truly grand scale.

http://krugman.blogs.nytimes.com/2009/11/20/interest-rates-the-phantom-menace/#more-5561

[Kurt_and_Hunter]

1. I didn't want to editorialize in the OP. But, that said...

This whole scene is starting to resemble one of those anxiety dreams where you see the train coming but somehow lack the will to step off the tracks.

The deficit is a problem in the same way taking time off work for a life-saving operation is a problem... it is a relative problem. Compared to what?

Our debt 'crisis' is not an imminent threat. A systemic economic failure is an imminent threat. And one of the problems, though far from the greatest problem, with a lost-decade stagnant economy is that it makes it impossible to address the debt!

There is a creepy sense, even on DU sometimes, that the economy is fixed and now we need to reduce government spending and/or raise taxes.

The economy is not fixed.

Most of the growth above a stagnant 1-2% in our last GDP quarter--the thing that seems to be signaling people that we need to stop spending--was the direct infusion of federal borrowed money into the economy.

Again... Saying we need to cut the deficit is saying we need to cut economic growth because our current growth is largely a direct product of deficit spending.

And if the economy is not somehow primed to grow nicely on its own then there will be no federal revenues to pay down the debt going forward. So even deficit hawks should be pro-deficit right now.

[Kurt_and_Hunter]

2. ...

[slipslidingaway]

3. kick for later - back to zero recs n/t

[Kurt_and_Hunter]

4. This issue will decide the fate of our President and Party so of course it is ignored

Deficit and inflation hawkism is the one thing that can sink the Obama Presidency (nd the whole rest of the Democratic Party) like a stone

And few DUers care.

That's some sad shit.