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Wednesday, June 23, 2010

Do Deficit and Inflation Hawks Know Best?

This is a good example of what's going on with economic policy right now. Marty Feldstein thinks that people ought to be worried about inflation and budget deficits, and the fact that he can't find evidence of this worry puzzles him:

while inflation is very likely to remain low for the next few years, I am puzzled that bond prices show that investors apparently expect inflation to remain low for ten years and beyond, and that they also do not require higher interest rates as compensation for the risk that the fiscal deficit will cause real interest rates to rise in the future.

Instead of questioning his own assumptions in light of evidence that they are incorrect, he suggests implicitly that investors collectively -- i.e. the vaunted market with its ability to incorporate all relevant information into prices -- is wrong. So my question for the deficit and inflation hawks, who are generally those who believe markets to outperform humans in every conceivable way, is this. When do we abandon what markets are actually telling us and instead react to what we -- the less capable humans -- think markets ought to be telling us?

    Posted by on Wednesday, June 23, 2010 at 11:43 AM in Economics, Fiscal Policy, Inflation | Permalink  Comments (108)


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