Now, you could argue that Greece and Ireland had no choice about imposing austerity, or, at any rate, no choices other than defaulting on their debts and leaving the euro. But another lesson of 2011 was that America did and does have a choice; Washington may be obsessed with the deficit, but financial markets are, if anything, signaling that we should borrow more.My commentary on this was as follows:
What Krugman is mistaking here is the fleeing of investors into the $US as a safe haven, as a winner in the 'least ugly' contest for money. However, his argument is investors want the US to borrow more! He ignores the fact that it is quite possible that the US might actually lose the least ugly contest if the US were to grow the rate of debt accumulation. He also ignores the fact that bond yields have been held down through money printing, and that any appreciation in US bond yields would see more money printing to keep the yields down. Just the promise of more money printing will, of itself, keep yields lower.And then I quote Krugman as follows (my emphasis):
Again, this wasn’t supposed to happen. We entered 2011 amid dire warnings about a Greek-style debt crisis that would happen as soon as the Federal Reserve stopped buying bonds, or the rating agencies ended our triple-A status, or the superdupercommittee failed to reach a deal, or something. But the Fed ended its bond-purchase program in June; Standard & Poor’s downgraded America in August; the supercommittee deadlocked in November; and U.S. borrowing costs just kept falling. In fact, at this point, inflation-protected U.S. bonds pay negative interest: investors are willing to pay America to hold their money.My commentary on this was as follows:
And if the Euro crisis was not taking place? Let's imagine a world in which there is financial stability, that sovereign debts in Europe are sustainable, that the Japanese economy is sound and so forth. If investors were to then look at the US, I think that there would be huge flight of capital. And this is the point; in the reality of today, where might the capital fly to? Yes, Professor Krugman, the US has managed to continue to accumulate debt without any major problems so far. It is not because purchasers of bonds want the US to issue more debt, but they simply cannot think of anything else to do with their money. If there were new measures that saw an increase in the rate of debt accumulation, it would simply test the status of the US in the least ugly competition. It is not a test that would be advisable.Happily, an interesting study in the UK confirms exactly the points that I made. Although the study is for the UK, it is not difficult to see the points of comparison with the US:
Britain's borrowing costs are at a record low not because the UK is a "safe haven" but due to the Bank of England's money-printing programme, new rules requiring lenders to hold more gilts and the eurozone crisis, according to an analysis of the official data. [summary from the sub-head]As you can see, the report mirrors my view of the reason for the low yields in the US, although I did not mention banking rules in my post. The interesting point here is that Krugman goes on and on about the fact that others do not use evidence, and that he grounds his work in the evidence. However, what he does not discuss is that he uses the evidence which confirms his own views. This is known as confirmation bias, and something to which we all sometimes submit. However, it is Krugman's continual attempts to delineate himself from other by claiming evidence that is so notable.
So, yes, US treasury yields are low. No, this is not because investors want the US to grow its debt.