On his blog this week, Paul Krugman again addresses the fear that the world will lose confidence in the U.S. government’s ability to pay back its debt and stop lending it money (i.e., buying Treasury securities). Nobody who worries about this happening, he charges, as far as he can tell, has ever actually thought about what would happen if other countries stopped buying U.S. debt. He, on the other hand, has thought about it, and there’s nothing to worry about, he assures us. If China, for example, stopped buying Treasuries, the worriers have said this would drive up interest rates. But, he, who has actually thought that far ahead, assures us that this wouldn’t happen. Why not? Simple. Because the Federal Reserve can just print money to buy up the Treasuries to keep interest rates at zero. “So the conventional wisdom about how we have to fear a Chinese bond-buying strike just doesn’t make sense,” he professes. He concludes:
You may find it hard to believe that so many important and influential people could be dead wrong about the basic economics of our situation. But as far as I can tell, this is simply something “everyone knows”, and none of them have ever thought it through.
So Krugman has thought one step ahead of his intellectual opponents. If economic forecasting was a game of chess, he’d have their queens and be moving in for checkmate. Or, at least, that’s what he’d think. No matter what was actually happening in the game or how hopeless a situation he had gotten himself into.
First off all, this is the same guy who advocated that the Fed create a housing bubble to replace the dot-com bubble. So there’s that.
Secondly, as I pointed out last week, Krugman repeatedly pointed to consecutive Congressional Budget Office (CBO) reports as evidence that there was no debt crisis in sight, even though those same reports warned that the day would come when the world loses confidence in the U.S.’s ability to repay it and stops buying Treasuries, resulting in rising interest rates.
Then, while the debate over raising the debt ceiling raged on, Krugman himself was invoking the fear of a loss of confidence by the rest of the world in the U.S.’s ability to repay its debt. Just last month, he wrote that he was puzzled over the lack of alarm of the possibility that “U.S. government debt, until now regarded as the ultimate safe asset, suddenly becomes not so safe”, which “could drive up short-term interest rates”. It would be a “financial catastrophe” for the world to lose confidence in the U.S.’s ability to repay, he wrote. This would precipitate “a huge financial crisis”. The possibility of purchases of U.S. government debt selling their bonds was “a scary prospect”.
Then, after a deal was made to kick the can further down the road, Krugman was back to belittling the “Very Serious People warning that China might lose confidence in America and start dumping our bonds”. This would “would probably be good for America”, he reassured us, and the “scaremongering” about what would happen if this occurred “literally makes no sense at all”.
Thirdly, who is the one who hasn’t thought this through? Let’s say China stopped buying U.S. debt and the Fed did what Krugman suggests. How does the Fed keep interest rates down? By creating “money” out of thin air to purchase debt instruments. As he is implying here, and as he has explicitly written previously, Krugman thinks that the Fed can just create whatever amount off dollars necessary to buy up whatever amount of Treasuries necessary to keep interest rates low so that the U.S. government may continue to borrow and borrow and borrow. Is there any reason why the Fed couldn’t do that? he asked in a blog post last month.
If you can’t think of one, I left some hints for you in my response to that post, here.
You’ll see why Bob Wenzel at Economic Policy Journal called that post in which Krugman belittled the “Very Serious People” for not having thought this matter through “Probably the Dumbest Thing Krugman Has Ever Written“. And that’s saying a lot. As Wenzel summarizes:
China holds $1.27 trillion of U.S. Treasury securities. Depending upon how fast the securities were sold it would not only push upward pressure on rates, but send the Treasury bond market into a tailspin, without massive Fed intervention. As for such a Fed extension of quantitative easing, Krugman writes as though the Fed will never, ever have to take into consideration price inflation. They can just print on and on.
Then again Krugman reiterated his theme. “Oh, dear. I’m starting to notice a shift in the scare talk,” he wrote on his blog several days ago, “dire warnings that we’re endangering the dollar’s role as a reserve currency.” Making the case that this isn’t anything “we should worry about”, he “rules out China” as a “threat to the dollar”. There’s no need to “get bent out of shape” over such a loss of confidence in the government’s ability to repay its debt. “You often hear claims that we’ve only been able to run persistent trade deficits because of the special role of the dollar; this is just false,” he professes.
So let’s turn to what one of the fearmongerers who just hasn’t thought this through well enough has to say about it:
Dollar purchases by China and other foreign governments have … kept U.S. interest rates low despite the enormous government borrowing required to cover the budget deficit…. Here’s what I think will happen if and when China changes its currency policy, and those cheap loans are no longer available. U.S. interest rates will rise… [and] we’ll suddenly wonder why anyone thought financing the budget deficit was easy. In other words, we’ve developed an addiction to Chinese dollar purchases, and will suffer painful withdrawal symptoms when they come to an end.
So what Very Serious Person wrote that?
Why, none other than Paul Krugman, of course! That was him in 2005. You know, when it was a Republican rather than a Democrat who was running up the debt. That was also when it had become clear that there was a housing bubble. As I discuss in my book Ron Paul vs. Paul Krugman: Austrian vs. Keynesian economics in the financial crisis, he was trying to shift attention away from the very same Fed policy he had advocated of pushing interest rates down specifically in order to spur a boom in housing by trying to blame China for the low rates that caused the bubble through its purchases of U.S. Treasuries. (Here’s a brief summary of his record on the housing bubble; get the book for more detail, context, and documentation.)
As you can see, Krugman plays this game by his own rules: heads, he wins; tails, his intellectual opponents lose. Every time. No matter what the facts are. You begin to see why I wrote in my previous post on the subject that the man cannot be taken seriously.