the Middle Ages, the call for a crusade to conquer the Holy Land was
met with cries of “Deus vult!” — God wills it. But did the crusaders
really know what God wanted? Given how the venture turned out,
that was a long time ago, and, in the areas I write about, invocations
of God’s presumed will are rare. You do, however, see a lot of policy
crusades, and these are often justified with implicit cries of “Mercatus
vult!” — the market wills it. But do those invoking the will of the
market really know what markets want? Again, apparently not.
the financial turmoil of the past few days has widened the gap between
what we’re told must be done to appease the market and what markets
actually seem to be asking for.
get more specific: We have been told repeatedly that governments must
cease and desist from their efforts to mitigate economic pain, lest
their excessive compassion be punished by the financial gods, but the
markets themselves have never seemed to agree that these human
sacrifices are actually necessary.
Investors were supposed to be
terrified by budget deficits, fearing that we were about to turn into
Greece — Greece I tell you — but year after year, interest rates stayed
low. The Fed’s efforts to boost the economy were supposed to backfire as
markets reacted to the prospect of runaway inflation, but market
measures of expected inflation similarly stayed low.
have policy crusaders responded to the failure of their dire
predictions? Mainly with denial, occasionally with exasperation. For
example, Alan Greenspan once declared the failure of interest rates and
inflation to spike “regrettable, because it is fostering a false sense
of complacency.” But that was more than four years ago; maybe the sense
of complacency wasn’t all that false?
in all, it’s hard to escape the conclusion that people like Mr.
Greenspan knew as much about what the market wanted as medieval
crusaders knew about God’s plan — that is, nothing.
fact, if you look closely, the real message from the market seems to be
that we should be running bigger deficits and printing more money. And
that message has gotten a lot stronger in the past few days.
I’m not mainly talking about plunging stock prices, although that’s
surely telling us something (but as the late Paul Samuelson famously
pointed out, stocks are not a reliable indicator of economic prospects:
“Wall Street indexes predicted nine out of the last five recessions!”)
Instead, I’m talking about interest rates, which are flashing warnings,
not of fiscal crisis and inflation, but of depression and deflation.
obviously, interest rates on long-term U.S. government debt — the rates
that the usual suspects keep telling us will shoot up any day now
unless we slash spending — have fallen sharply. This tells us that
markets aren’t worried about default, but that they are worried about
persistent economic weakness, which will keep the Fed from raising the
short-term interest rates it controls.
rates on much European debt are even lower, because Europe’s economic
outlook is so bad, and we’re not just talking about Germany. France is
currently in conflict with the European Commission, which says that the
projected French deficit is too big, but investors — who are still
buying French bonds despite a 10-year interest rate of only 1.26 percent
— are evidently much more worried about European stagnation than French
also instructive to look at interest rates on “inflation-protected” or
“index” bonds, which are telling us two things. First, markets are
practically begging governments to borrow and spend, say on
infrastructure; interest rates on index bonds are barely above zero, so
that financing for roads, bridges, and sewers would be almost free.
Second, the difference between interest rates on index and ordinary
bonds tells us how much inflation the market expects, and it turns out
that expected inflation has fallen sharply over the past few months, so
that it’s now far below the Fed’s target. In effect, the market is
saying that the Fed isn’t printing nearly enough money.
question you might ask is why the market’s pro-spending,
print-more-money message has suddenly gotten louder. My guess is that
it’s mainly driven by events in Europe, where the slide into deflation
and the growing public backlash against austerity have reached a tipping
point. And it’s very reasonable to worry that Europe’s problems may
spill over to the rest of us.
any case, the next time you hear some talking head opining on what we
must do to satisfy the markets, ask yourself, “How does he know?” For
the truth is that when people talk about what markets demand, what
they’re really doing is trying to bully us into doing what they
Can Krugman ever write a piece without drooling over the horrible Samuelson? Jeez. And can he ever let the obvious meaning click in his neoclassically brainwashed mind, that shines through in everything he observes but never gets, of the "false household analogy"?ReplyDelete