Comments on: Bishop vs Krugman A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: ryanmburke19 Wed, 20 Jun 2012 13:56:55 +0000 My principal issue with Krugman’s argument is that he seems to believe that just because the market is sanguine today, it will also be so tomorrow and/or that there will be time to make adjustments after the market gets spooked. All one has to do is look where CDS on CDOs were trading in late-2006 and where European sovereign CDS were trading prior to the financial crisis or even as late is the winter of 2009.

Fixed Income and derivative markets often stick at irrationally tight levels for long enough that the issuer is allowed to over-issue. Then when sentiment turns, the weight of the outstanding liabilities crushes the issuer. It is unfathomable to me that this would even need to be explained to a Nobel prize winner.

By: TFF Wed, 20 Jun 2012 12:50:22 +0000 @Chris08, to some degree I agree with you. I’ve repeatedly said here that people NEED to learn about investment if they have savings. Otherwise all of the real profits flow to the bankers and money managers.

Yet I also agree with those who object that most people have neither the education (they are lucky if they can balance a checkbook properly), the temperament (panic in even small market dips), or the interest (did you see American Idol last night?) to do so successfully. Perhaps one in ten can successfully manage their savings, the rest are (according to GS) muppets.

For these reasons, most people’s comfort zone stops at fixed income investments. Preferably insured, so they don’t need to worry about credit risk.

As for TIPS, you do realize that they do not keep up with inflation, right? First, you need to go to a long maturity before you get a positive coupon these days. Second, the inflation adjustments are taxable as ordinary income. So you only get to keep 75% of the inflation adjustment. Third, there is a reasonable argument to be made that the CPI understates the effective rate of inflation, especially for seniors. They care less about the falling price of consumer electronics, more about housing, food, and health care.

Unlike MrRFox, I’m not one to take inflation off the table. In the present environment, it might be the least painless solution. Worth at least exploring that possibility? But in isolation, inflation harms the majority of retirees, more than any other easily identified group I can think of. If we wish to support their standard of living, we would need other policies (e.g. medical reform) to balance that.

By: MrRFox Wed, 20 Jun 2012 04:46:26 +0000 @Chris08 – One supposes that if you “fail to see why”, then that ends it. Matter resolved. Besides, inflation worked wonders for Zimbabwe, didn’t it?

By: Chris08 Wed, 20 Jun 2012 03:45:11 +0000 Re the inflation argument. I fail to see why people can’t be expected to learn something about money and investment if they have savings. Claiming government policies must above all protect the ignorant or lazy hardly seems a good way to improve the economy in general. And the idea that currencies should never depreciate is simply foolish; they do so all the time, faster during some periods, slower during others. Some degree of inflation is a fact of life the world over. At present inflation is very low in the US; often this is the effect of a stagnant economy not growing. I think economic growth is far more important than a dollar that never loses any value. A higher rate of inflation would be good for the US economy. And savers should have the initiative to cope with it. PS there are always TIPS for people who have a phobia about inflation. Find out about them.

By: trevorh Tue, 19 Jun 2012 20:50:25 +0000 From Strych09:
“TFF: if for good reason or bad, the credit markets shut down, whether or not the US can pay off its maturing debt will be the least of your (or mine, or Curmudgeon’s) problems. Your primary concern at that point will be how fast you can stock your fallout shelter and how much ammunition you can get your hands on.”

The best comment I have seen in a long long time.

By: TFF Tue, 19 Jun 2012 18:15:15 +0000 “Why do you think printing dollars and printing USTs are different things?”

@Steve, They aren’t terribly different, are they? So equate the two — we rely on there being a strong market for our currency/debt. We are rolling over all maturing debt and printing $1T of new debt annually. What happens if demand dries up?

I understand that right now the markets are telling us that demand is strong. Some people seem to believe this means that demand will ALWAYS be strong. I’m skeptical, since I’ve seen the markets turn on too many entities in recent years, both corporate and sovereign.

Answer me three questions straight:
(1) Is it inconceivable that demand for US dollars/Treasuries will slow?

(2) Do our present fiscal policies have any influence on the likelihood of demand slowing?

(3) What happens to the US economy if this happens?

By: SteveHamlin Tue, 19 Jun 2012 17:57:26 +0000 @TFF: you wrote “If private demand for this debt were to dry up, and the Fed were forced to print $2T-$3T a year of new money, what impact would that have on the economy?”

Why do you think printing dollars and printing USTs are different things?

By: trevorh Tue, 19 Jun 2012 17:40:13 +0000 @Strych09

While I have very little agreement with Krugman, I completely agree with him about inflation rate of 4%. To be honest I even want a 6-8% inflation to solve one part of the current depression problem quicker (too much government debt).

But it needs to be done after government of stupid countries goes into primary surplus first!!! (surplus without cost of debt)

However, I disagree about how to spear up inflation while keeping necessity cost down.
That is government spending CANNOT be considered!

In addition, it has to be global inflation. Inflation in the West only will just lead to higher wage and higher cost of exporting for the West and thus leads to deeper global trade imbalance reducing their export further. Nothing will get solved.

China (perhaps Korea and Germany) needs to allow wage to rise, their demand at global stage to go up.

I said this before so saying it again, China demand at global stage has to go up. Otherwise, things are not going to get better.

And don’t even bother with India or Brazil. These economies are overrated, compared to China, they are just fruit flies!!!

By: TFF Tue, 19 Jun 2012 17:37:29 +0000 @Strych09, I would suggest that you are looking at it from the wrong direction. We agree that if the credit market shuts down for the US Treasury it would be a financial disaster — a real disaster that would make the Great Depression look like a cake walk.

So, which set of policies minimizes the risk of this happening? Borrow-and-spend stimulus? Tax-and-save austerity? Stable currency? Inflation?

The advantage I see for austerity is that, in repairing the primary deficit, the dependency on continued borrowing is reduced. That leaves more options on the table in the future.

The advantage for borrow-and-spend is that austerity is naturally deflationary, in an already depressed economy. A hopeful strategy, but I fear we’ve gone too far along this path already to generate the kind of stimulus that might make it work. Besides, our present system leaves all the wealth in the hands of the 1%. Hard to reach sustainability without fixing that.

While I haven’t read Krugman’s book, I’m happy with a 4% inflation target, even if they overshoot. In my ignorance, I’ve been anticipating 5%-7% inflation whenever the economy picks up.

I simply object to the assertion that the presently low borrowing rates mean we don’t need to worry about our debt load. As referenced above, market sentiment can change rapidly. The ability to borrow at a 2% rate today does not promise that the markets will support our credit needs tomorrow.

“Inflation would merely lower the standard of lving even more.”

@fresnodan, that is the DEFINITION of austerity. Inflation is simply one way to achieve it. Pick your poison — and try not to spill it all over once you’ve made your pick.

By: fresnodan Tue, 19 Jun 2012 17:14:10 +0000 It is kind of amazing that those who believe in the inflation panacea either don’t remember the 70’s or were too young to experience it. As well as the fact that there is no more wage push inflation. Inflation would merely lower the standard of lving even more.
I imagine we will have inflation in things we need (food and fuel) and deflation in things we don’t (McMansions).
And who does the whole FED money creation operation benefit??? The FED IS BANKERS – and is GIVING money, in the form of interest free money to banks, to use to “lend” (or really, “proprietary” trading, AKA gambling, which makes perfect sense when your losses at the casino are paid by the FED) at a profit. The only problem, the one reason for the TBTF banks, is to be an efficient allocater of capital. But they WERE NOT – they are corrupt and they failed to make economically sound loans, because they wanted bonuses. They still do.