Nothing To See Here, Move Along

Kevin Drum, echoing Paul Krugman, looks at rising interest rates on Treasuries and decides that there is nothing to see here, move along.   You will all be relieved to know that these rising interest rates have nothing to do with a couple of trillion dollars in new government borrowing, and the effect that this borrowing (and wild money printing) might have on

  • Inflation
  • Sovereign risk
  • Supply and demand for credit

Boy, do I feel better.

PS - And remember, if interest rates do start exceeding historical norms, Krugman will discover that it is Bush's fault.


  1. Michael:

    I have trouble understanding Paul Krugman logic. He write well reason and organized points of view, but some how keeps coming to the conclusion that the great depression was the best economic time in the country.

  2. Eric:


    Actually, Krugman blames the country's current economic problems on Reagan.

    What are your thoughts on how much Regan contributed to our current situation?

  3. Methinks:

    Michael, you have trouble understanding Krugman's logic because Krugman is a stranger to logic. His arguments are well reasoned only if you ignore the laws of economics as well as history and reality.

    The interest rate curve has flattened as yields at the front end of the curve went up much more than the back end yields (by 27 bps over two days) - an indication that the bond market thinks the Fed will have to raise interest rates within the next year or so. Also, the growth of M2 has slowed, so it seems that the Fed is pulling back on QE. So, it seems that the next big challenge for the Fed is the same as the one it faced in 2003-2005 - rising inflation. Given what the last set of interest rate hikes produced, I doubt there will be the political will to raise the interest rate. Stupid borrowers will be inflated out of their indebtedness and the last few prudent folks left in America will be taught a very harsh lesson.

  4. Brad Warbiany:

    I'm with you on calling out Kevin Drum on a regular basis, but this seemed to be a reasonable criticism of the *current* bond rates.

    Simply, during the major crisis when we had a worldwide "flight-to-quality", you saw so many people trying to buy safe treasury bonds that the rates fell to the floor. Right now if you look at the 10-year T-bill, it's still at a level below where it was for most of the last 5 years as well as lower than it's been for just about all the time that Yahoo! Finance tracks it (since 1962).

    I call this the market reverting to the mean, not a calamitous signal in and of itself.

    I do think that we're both in agreement on the endgame. The colossal spending and requisite borrowing WILL force bond rates above the historical 10-year mean and possibly to levels similar to those seen in the late 1970s. But at the moment, we don't need to rely on the long-term inflation expectations to explain the reversion to mean behavior of the market. I've long felt that Occam's Razor is a far-overused concept, but in this case I think it's valid. Why assume it's high inflation expections when rates are no higher than they've been in previous low-moderate inflation points in history?

  5. jb:

    This is really unfair to Krugman, and you're really distorting his record.

    I've seen several occasions where Krugman's acknowledged that it's not all Bush's fault. He's also been blaming generic Republicans.

  6. Michael:

    Methinks, I can understand the flaws in Krugman's arguments. What gets me is would Krugman walk up to my granddad, slap him on the shoulder, and say "Hey old timer, 34 wasn't that bad. We had 9% growth." I guess with the depression era people dying off, people like Krugman are for the most part going to get a free pass.

    Now what I haven't seen discussed is the effect of FDR taking gold from $20oz to $35oz. Krugman writes about 9% to 11% yearly growth during the depression. Was thus offset by inflation? Did FDR print money?

  7. txjim:

    ***Now what I haven’t seen discussed is the effect of FDR taking gold from $20oz to $35oz. Krugman writes about 9% to 11% yearly growth during the depression. Was thus offset by inflation? Did FDR print money?
    That was back when we had a gold standard that constrained the Krugmans and Bernakes of the time. What FDR actually did was force people to turn in their bullion for $20.67 an ounce then turned around and devalued the dollar to $35 an ounce.

    From the late great Jude Wanniski's site (

    ...when the Fed began to monetize government debt in April of 1932, gold drained out of the Treasury at a rate indicating the market did not want liquidity, ending the experiment. It was not until 1934 that President Roosevelt made another gesture to the monetarists of the era, agreeing to devalue the dollar by 59% in 1934, to $35 from $20.67. The theory was to take pressure off debtors by making their debts cheap, but as part of the New Deal legislation, Americans had to turn in all their bullion for cash. At what price? $20.67 per ounce! What an outrage! The citizens turn in their gold at the low price, then the government announces a high price, which means FDR took $4 billion in wealth out of the economy in order to show increased revenues on the government’s books.

  8. Rathtyen:

    I am the treasurer of the company that employs me, and a few days ago forward hedged interest rates for $500 million out to ten years. The reason was the forward rate curve in Australia rose over 100 basis points (1%) in May.

    The banks here are very candid about the reasons: financial market nerves due to the growing government deficit spending in Australia and elsewhere, especially the USA.

    It is really hard to see how rates can stay down given the massive amounts that need to be financed.

  9. K:

    "And remember, if interest rates do start exceeding historical norms, Krugman will discover that it is Bush’s fault."

    No doubt he already has. However, to avoid confusing his readers, he will wait for the event to take place before publishing.

  10. EscapedWestOfTheBigMuddy:

    To be fair, with Medicare part D and the first few rounds of bailouts, the Bush administration is in line for a share of the blame. No doubt the current administration will overshadow those pitiful early efforts, but that doesn't let the Decider in Chief off the hook completely.