On DeLong V Krugman
Brad DeLong and Paul Krugman are having a mini debate on whether Brad et al (that means the Clinton administration) had good reason to fear bond vigilantes in the 90s. Krugman wrote tht they did not.*
Krugman phrases Brad’s argument as high deficits cause high inflation which causes tight money. He notes that the inflation implies high nominal interest rates and low real interest rates so it should cause high demand now and writes “It’s not at all easy to tell a coherent story in which the effect of future expected deficits on today’s interest rates is contractionary “ I’m not going to let a challenge like that get by me. On the spot, without using pen or paper I try 2
1) Very political economy and trying to read Greenspan’s mind of the time. Greenspan would have punished Congress and Clinton for disobeying his command to cut the deficit with high interest rates. Note I make no reference to inflation. In fact, in my model, I assume there is no inflation. Monetary authorities using tight money to punish elected officials for violating Austerian doctrine strikes me as totally obviously what regularly happens (note your discussion of episodes of alleged expansionary austerity, in any case deficit reduction followed by high growth and speculate as to why Alesina claims that spending cuts work better than tax increases).
Basically the story that we have to do what Greenspan says or he will make US workers suffer makes a whole lot of sense to me.
2) Hmm I will assume that productive capital depreciates very quickly (and so is just a material input reall) so long term interest rates matter only for home construction (this is just an unrealistically for exposition strong version of something you wrote here) . I will assume that the home equity loan (heloc) market is not developed and people think of taking a second mortgage as a desperate last resort (I think this was true in 1993). Finally assume extreme nominal wage rigidity. Really assume that medium income economic agents assume extreme nominal wage rigidity so inflation implies low real wages. In fact, assume nominal wages are permanently fixed so inflation is high prices for while but is eventually followed by deflation to get real wages back to normal. A couple with low financial wealth considers buying a house. The relevant real interest rate is the nominal rate corrected for wage inflation. Oh that’s the nominal rate.
Yes someone has to have financial wealth. I assume people accumulate it after paying off their mortgage. These people would face a negative real interest rate. There would be the effect of the change in real interest rates on their consumption. I assert that the effect of real interest rates on consumption is negligible. This can be modeled assuming those with financial wealth are rentiers without labor income and that they have logarithmic utility. But I assert that it is clear from the data and that any discussion of important effects of real interest rates on consumption and saving is proof of detachment from reality.
Here the story really is that what depends on interest rates is housing and that the housing market depends on the ratio of a monthly mortgage payment (notably nominal) and current wages. It does require sophisticated investors in the bond market and unsophisticated home buyers (given the other assumptions that’s just to rule out the heloc borrow from Peter to pay Paul strategy).
I think this second story is the truth, nothing but the truth, and the only truths that are relevant to the debate which I call for Brad.
* update: Preceding sentence revised and one sentence deleted.
not to disagree, but just to point out this entire mini-maelstrom was initiated by this post by greg mankiw…A Krugman Puzzler
I distinctly remember commenting in the 90’s that every time Greenspan raised the rates it was just intime to stop the rising wages. How nice of him…NOT!
Mike posted here showing that the Feds appear to play favorites with money policy, at least in the past.
@ rjs. Krugman has stated a few times now that his ideas have evolved. With that he also notes that we are under different circumstances; we currently find ourselves in a “liquidity trap”. I think this is more of an evolution of his own thoughts rather than a flip flop. Although I do see a few minor descrepancies. Although bond viglantes do seem irrational it does seem reasonable that the FED (Greenspan) could have substantial influence over policy.
DeLong argued that they really mostly feared the Fed not say fears of US default.
What does this mean? So badly written it is incomprehensible.
quote
DeLong argued that they really mostly feared the Fed not say fears of US default.
unquote
think you are missing a comma after “not” and “say”
I wonder of your opinion of a senior who applied to be a grad student in your dept, and who had written such a sloppy lead for his/her post
So, the only thing to fear is not fear itself – but rather Alan Greenspan’s fears that workers might actually paid what they’re worth in a free market for labor.
This comment has been removed by the author.
chris and soccer dad
there was a link to click. If you found my one sentence summary too poorly written, you could have clicked (twice to get to Brad).
I don’t see find the sentence unclear(for all I know it lacks a comma).
The following two sentences make the claim as clearly as I can.
“DeLong wrote that Clinton and advisors feared the Fed. DeLong did not suggest that they worried that investors would worry about US default.”
Do you understand what I am trying to say now ? In what way was the original sentence less clear ? Can you think of another interpretation of the original sentence ?
Soccer dad: Where do you think the comma should be added ? I do not consider punctuation when evaluating students (it would be silly to do so as they are almost all native Italian speakers and Italian punctuation is different from English punctuation).
I have delete an older draft of this comment which was quite rude. I will just type that I have very unfavorable impressions of chris and soccer dad.
To quote Krugman (from memory) links are not decorative. Only if you clicked the link and didn’t find the answer should you complain that I left something out.
I believe the Facebook term is “grammar Nazi,” and, while they can take up a lot of space in your comment section, they are essentially harmless.
Robert
and Doc
I have my own problems with the grammar Nazis. But there is arguably a reason for “grammar” and the occasional comma. I would have found Robert’s quote easier to read if it had had commas around “say” as is usual.
Generally if real readers (not Grammarians) are having trouble understanding what you write, it is a good idea to try to help them out by rewriting or including some helpful punctuation. Note that I frequently get into trouble by using “you” the way I used it this (previous) sentence to mean a kind of generic “you” and not “you the person reading this.” I am working on that.
As for the decorative links, I disagree entirely. Links should only be used to direct the reader to sources for verification of quotes, or possibly “additional information” not easily included in a short note. Otherwise an essay should stand on its own.
Please note I am as guilty as anyone of these sins against good writing. I excuse myself because a blog is not a learned paper and does not justify the time necessary for careful writing. But don’t blame the reader. Some of them honestly can’t understand what you said because you didn’t say it very well. And some of them, of course, are only interested in scoring grammar points. We learn to distinguish.
Bond vigilantes do not apply to a country with a sovereign currency. It is a battle they cannot ever win. They can only battle countries that are not sovereign (e.g. Greece) or currencies with pegs like Argentina. The sovereign currency Fed and treasury will always defeat the vigilantes.
Krugman is Right; The Bond Vigilantes are Impotent
http://www.economonitor.com/lrwray/2012/11/25/krugman-is-right-the-bond-vigilantes-are-impotent/
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http://moslereconomics.com/wp-content/powerpoints/7DIF.pdf
Page 94
Back then (early 90’s Italy was sovereign with Lira), it was the government of Italy, rather than the United States, which was in crisis. Professor Rudi Dornbusch, an influential academic economist at MIT, insisted that Italy was on the verge of default because their debt-to-GDP ratio exceeded 110% and the lira interest rate was higher than the Italian growth rate.
Things were so bad that Italian Government Securities denominated in lira yielded about 2% more than the cost of borrowing the lira from the banks………
I said nothing, giving him more time to consider the question. A few seconds later he jumped up out of his seat
proclaiming “Yes! And the International Monetary Fund is making us act pro cyclical!” My question had led to the realization that the IMF was making the Italian Government tighten policy due to a default risk that did not exist.
Our meeting, originally planned to last for only twenty minutes, went on for two hours. The good Professor began inviting his associates in nearby offices to join us to hear the good news, and instantly the cappuccino was flowing like water. The dark cloud of default had been lifted. This was time for celebration!
A week later, an announcement came out of the Italian Ministry of Finance regarding all Italian government bonds – “No extraordinary measures will be taken. All payments will be made on time.” We and our clients were later told we were the largest holders of Italian lira denominated bonds outside of Italy, and managed a pretty good few years with that position.
Italy did not default, nor was there ever any solvency risk. Insolvency is never an issue with nonconvertible currency and floating exchange rates.
Coberly, I agree on the commas. On links not so much. I am commenting on a debate. I think it isreasonableto expect someone who is not satisfied by my 2 sentence summary to click the link. The topic of the sentence was “what Brad wrote” andhis blog is a good source for that.
In any case, the quoted Krugman passage was the topic of my post. The background sentences were not really needed at all. Commenting on them is very odd. I will update the post.