« "An Umbrella that Melts in the Rain" | Main | links for 2009-06-05 »

Thursday, June 04, 2009

"The Bond War"

 What is the bond market telling us?:

The Bond War, by Daniel Gross, Slate: It's fair to say that 10-year and 30-year Treasury bonds are not subjects that enthrall the American public... In the last six months, however, the state of those bonds has become the subject of feverish argument in the economic elite. The interest rate of the 10-year Treasury bond has spiked from 2.07 percent in December 2008, when the world was falling apart, to a recent high of 3.715 percent on June 1... Now factions led by economist Paul Krugman and historian Niall Ferguson are feuding bitterly about the import of these charts. In late April, Krugman and Ferguson squared off at a New York Review of Books/PEN panel, and they've continued with an op-ed war in the Financial Times and New York Times (Ferguson here and Krugman here).

In a nutshell, Ferguson and his allies believe that the rising bond yields prove that markets are worried about the inflation that will inevitably result from the fiscal policies of the Obama administration and the Fed. ... Ferguson's fears have been echoed by the planet's leading inflation-phobe German Chancellor Angela Merkel and by influential Stanford economist John Taylor. Turn on CNBC, and you're likely to hear talk about bond-market vigilantes, the mass of traders who sell bonds and push interest rates up in order to warn governments not to spend freely.

Krugman and his fellow travelers couldn't disagree more. Far from being a sign of failure and impending disaster, they say, the rising bond yields actually signal success and impending improvement. ... Clear-headed as always, Martin Wolf of the Financial Times notes: "The jump in bond rates is a desirable normalisation after a panic. Investors rushed into the dollar and government bonds. Now they are rushing out again. Welcome to the giddy world of financial markets." This line of argument makes sense...

In ... this instance, the Fergusonians lack credibility. H.L. Mencken tagged the Puritans as people possessed of the "haunting fear that someone, somewhere, may be happy." Ferguson represents a strain of intellectual Toryism bedeviled by the haunting fear that someone, somewhere may be getting social insurance. ... Their solution to the problem of large deficits always seems to be to cut entitlements and never to raise taxes.

As for the bond vigilantes, have you noticed that they seem to surface only when a Democrat is in the White House? Stanford's John Taylor didn't write many articles about the inflationary aspects of rapidly expanding deficits when the Bush administration and Congress were turning surpluses into huge deficits, massively increasing government spending, and creating a new Medicare prescription drug entitlement. He was working in the Bush Treasury Department. ...

Federal Reserve Chairman Ben Bernanke, seemed to split the difference yesterday. "However, in recent weeks, yields on longer-term Treasury securities and fixed-rate mortgages have risen," he told Congress. "These increases appear to reflect concerns about large federal deficits but also other causes, including greater optimism about the economic outlook, a reversal of flight-to-quality flows, and technical factors related to the hedging of mortgage holdings."

    Posted by on Thursday, June 4, 2009 at 01:55 PM in Budget Deficit, Economics, Fiscal Policy, Inflation | Permalink  TrackBack (0)  Comments (36)


    TrackBack URL for this entry:

    Listed below are links to weblogs that reference "The Bond War":


    Feed You can follow this conversation by subscribing to the comment feed for this post.