Commentaries
Now raising intellectual capital
from Rolfe Winkler:
Krugman on the invisible bond vigilantes
Paul Krugman is complaining of deficit hysteria over on his blog again. Where are the bond vigilantes? he wonders. Since we're still able to sell debt so cheaply, why is anyone worried about more deficit spending?
As always, there are numerous holes in his argument that he chooses to ignore.
1. The chart he uses is the most charitable view of America's public debt burden. It's simply public debt outstanding. This ignores money the government owes itself to fund future benefits. More importantly, it ignores unfunded liabilities. Paul puts debt to GDP at 60%. In reality, public debt is closer to 500%. And that's using 2005 figures.
2. Krugman ignores private debt (household, business, financial) which still stands at a suffocating 300% of GDP according to the latest flow of funds report. If households are drowning in private debt, they can't exactly afford tax increases to pay off more public debt. This is a key argument against those who say that we can borrow more because we have in the past, specifically during the '40s when we were fighting WW2. Yes, public debt was much higher then. But private debt had been virtually wiped out by the Depression. So the total public + private debt burden was far lower than it is today.
(Click chart to enlarge in new window)
Again, the chart above excludes unfunded liabilities. Including them would put the total debt burden closer to 800% of GDP. Truly an astonishing figure.
Latvia: hold that peg!
 Latvia’s currency peg to the euro has become a punchbag for economists convinced that the Baltic state is inflicting unnecessary pain on its citizens. But devaluation of the lat risks mass defaults by citizens and companies. Four-fifths of private loans are in euros, and large-scale default would cripple the banking system. The Swedish banks that have lent billions of euros in Latvia would also be vulnerable.
Latvian devaluation would unleash a chain reaction around the Baltic and beyond. Lithuania and Estonia would face huge pressure to follow, and the knock-on effect could hit Bulgaria, which also has a currency board, and put pressure on other central European currencies. Devaluation would wreck any early prospect of Latvia joining the euro zone, which the former Soviet republic sees as a safe haven of financial stability and political independence.Â
IMF undermines EU fight for Lativa peg
 Just when it looked as if Latvia’s currency peg to the euro had weathered the storm, the International Monetary Fund has raised fresh doubts by withholding funds for the Baltic European Union newcomer.Â
 The IMF is right to demand a credible medium-term strategy for budget reform, but it would be wrong to risk contagion in eastern Europe by questioning the currency board. If one thing
could undermine the EU’s bid to avoid a wave of devaluations around the Baltic states, with knock-on effects for Swedish banks and potentially for central and eastern Europe, it is conspicuous differences between the IMF and Brussels.
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The Wall
