How one fool got lucky
Fools often get lucky. Case in point: Paul Krugman. An indomitable supporter of the speculative bubble fueled by low rates, he kept chanting "print, baby, print" and dismissing bond vigilantes, which was a bad call but turned out to be accurate. But Krugman did not understand that it was NOT because of the bad economy. GDP figures may be weak, but it doesn't mean that 2% 10-year Treasury bonds are popular with American investors. I am not buying bonds, are you? The actual reason for bonds' recent performance is threefold: 1) The Fed is buying treasuries, something that Krugman implies DID NOT happen, 2) Banks are practicing the Fed notes carry trade, and 3) the European Central bank DID NOT follow Krugman's "print, baby, print" advice, which made European debt ratings look closer to reality, and made the stupid money rush away from the real danger and toward imaginary security. The moral: bond vigilantes are still as vigilant as ever, but they cannot do anything because they've been outshouted, outprinted, and, finally, outsourced.
Things are looking bleak for the economy; Goldman Sachs (no link) is predicting that 2nd quarter GDP growth will be revised down to 1.1%, and it’s downhill from here.
Yet from late 2009 until just the other day, all the Very Serious People were mainly concerned about the possibility of surging interest rates. Why?
I was looking back at some of my own notes about what happened last fall. At the time, there was serious consideration among the Obama people of pushing for some kind of second stimulus; what its chances might have been is hard to say. But the point is that they backed off. Why? My understanding is that they bought into the big scare of the time, which was that there was a “carry trade bubble” in the bond market, and terrible things would happen when it burst.
No, this never made sense. Anyone who looked at recent Japanese history should have realized that with a depressed economy, low rates could and did last a very long time.
And some of the scenarios being proposed were just plain bizarre: the bond bubble will burst, and this will plunge us into recession, and the Fed will have to buy up government debt, and this will mean inflation too. Really.
And then the whole story shifted: suddenly it wasn’t the carry trade, it was sovereign debt risks, we’re all Greece.
And now there’s a new one: you see, low interest rates will cause deflation.Really (near the end).
And though the story shifts, the moral is always the same: the little people have to suffer."