Tuesday, June 19, 2012

Krugman: High Interest Rates In U.S. Will Not Happen

Wow, an awesome clip that can be used in the future to prove Paul Krugman seriously wrong, again.

At roughly the 1:50 mark he says that interest rates can't go up like they have in the eurozone, because the U.S. has a floating currency. Does Krugman have any idea how high interest rates climbed in the United States in the early 1980s, even though the currency was floating at the time? Let's take a look:


Krugman then called for a devaluation of the dollar, i.e. money printing (which would cause rates to climb higher at an even faster rate), in the interview. Amazing.

Even the interviewer, NPR's Tom Ashbrook, justifiably looks stunned at Krugman's comments.



18 comments:

  1. How stupid do you think your readers are? That's an apple-oranges comparison. The Fed intentionally pushed up interest rates to curb inflation. He's referring to long-term rates at which investors are willing to lend the US. Bond vigilantes didn't pull the plug on the US in the '80s. It's tough not to be cynical here, bc either you know this and are intentionally misleading your readers or you really don't know this, which is scary.

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    1. Paul, it's always fun when you stop by. Please say hello to Robin and the cats.

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    2. So what are you suggesting? That inflation will not become a problem in the U.S. and therefore the FED will not have to push interest rates up intentionally. Or that long term rates on U.S. bonds and treasuries cannot possibly rise significantly unless the FED allows them to rise

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  2. Once you realize that Krugman is just a progressive/marxist propaganda tool, his flawed economic thinking can be easily dismissed.

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    1. Unfortunately, not by his Krugmanites readers.

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  3. Whenever I need a good laugh I just find a Krugman video.

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  4. Classic Krugman nonsense! Devaluing the dollar and amassing debt is nothing to be afraid of, but sometimes debt actually matters. The worm's "right" no matter how history plays out.

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  5. Amazing how glibly he discounts inflation with no regard for the millions of people it robs and impoverishes...disgusting.

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  6. YES! I have always wanted him on video or in print saying that US interest rates cannot rise.

    Next up, lets get Krugman to say gold will never reach $3000 an ounce.

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    1. I thought of this, too. We can think up all kinds of outrageous things for Krugman to say, and then goad him into saying them!

      However, on second thought, he is way ahead of us. Like the "invading aliens" soundbite. It kind of sucks all the challenge out of this activity--the bar is too low.

      Does that "Krugman in Wonderland" web page catalog all these things, for future comedic value?

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  7. Mr wenzel, I love your site; you have an amazing energy and austriam wisdom!!!

    But onthis post, you say "Krugman then called for a devaluation of the dollar, i.e. money printing (which would cause rates to climb higher at an even faster rate)"- I think thats incorrect; money printing it is the same of LOWERING the interes rates, is it not?

    Greetings from Lisbon, POrtugal - you are admired even in Europe!!

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    1. Eventually price inflation and free of default will cause rates to rise. For example, people will demand an inflation premium on the interest rates because of the devaluation of the dollar. The central banks don't have unlimited control of the interest rates. Mises.org/daily/4573

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    2. Ok, you are talking when there are extreme money suply, and it is impossible to lower interest rates from zero, wright? it is today panorama, correct?

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  8. I think he says whatever he thinks will shock the audience and bring in the ratings. He gave up being a credible economists years ago. He's a celebrity now that is seeking ratings and paparazzi, credible economic theory be damned.

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  9. "Originally, claims that deficits would drive up rates weren’t based on arguments about solvency; they were based on the “crowding out” claim that the government would be competing with the private sector for a limited supply of savings. Then, when the promised rate spike failed to materialize, this was attributed to Fed purchases, with the claim that rates would spike when those came to an end. Wrong, and wrong again. As I wrote at the time, all this represented a basic misunderstanding of how the economy works." Krugman's recent NYT Post http://krugman.blogs.nytimes.com/2012/06/19/interest-rates-varieties-of-error/

    Krugman is creating his strawman that people who argued that higher interest rates are coming are shifting their argument.

    The problem with both arguments is that it's a basic misunderstanding of who purchases Treasury bonds and for what purpose. Also, there's clearly a lack of analysis of the Credit Default Swaps, Interest Rate Swaps, and FX Swap positions taken out recently. Treasury bonds, notes, and bills are used as leveraging instruments by banks, corporations and trading shops. As the rest of their assets have been monetized by various government bailouts, they've parked their money in Treasuries, which generally have extremely low risk-weightings to meet their Tier I capital requirements. The risk exposure on the Treasuries is then further hedged by purchasing various derivative protection.

    The point is: those who are holding on to Treasuries are do so to fill regulatory capital requirements and they believe they are hedged from a fall in bond prices (increase in yields). Should bonds fall for some reason, who's ever selling derivatives exposure is a sitting on a massive amount of exposure.
    http://www.occ.treas.gov/topics/capital-markets/financial-markets/trading/derivatives/dq411.pdf
    Slide 23 is fun times.

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  10. Interestingly Spain is above 7% but were they to exit the Euro would this still be the case? Or would the FX embed the risk premium into the currency.

    Another point, if everyone is at 0% or about 2 percentage points from zirp what then adjusts for risk?

    While intuitively I understand why we think rates should rise if "they are artificially low" but I think one should consider that the exchange rate seems to accomplish a similar result in valuing risk on money no one wants to borrow

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  11. Near term, rates will not rise. The FED will continue to keep it's rate low. Primary Dealers will borrow at near zero and purchase 30 year bonds.

    This charade will continue until eventually the FED is the only buyer through massive QE. Then the scheme collapses.

    Rates will not rise anytime soon.

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  12. Paul needs to go paleo! Talk about excess reserves.

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