## Ghost Rider Bond Market Vigilantes in the Sky...

Paul Krugman:

The Invisible Attack Intensifies: Those wily invisible bond vigilantes are at it again: as part of their cunning plan, they have driven the 10-year bond rate down to 3.11 percent. As it happens, the Wall Street Journal has now been warning about the attack of the bond vigilantes for almost exactly three years.

Indeed.

I would be eager to fight the bond vigilantes via long-term deficit reduction plans if they were here, but they are not.

Could we at least wait until the ten-year Treasury rate go up above 6% before we shifted our focus away from present unemployment to future post-2020 deficits?

Meanwhile, I surfed on over to the Council on Foreign Relations website, hoping that while I was not looking I had hoped that while I wasn't looking it had upgraded its economic policy staff...

No such luck:

Benn Steil: [T]he United States Federal Reserve’s... “quantitative easing”... strategy to keep flooding the money pipes until credit starts flowing freely again from banks to businesses.... America plows on with the cheap option: flood the pipes and see what comes out.... The outside world, which relies on the dollar as its primary trade vehicle and therefore reserve asset, cannot be expected to watch passively as dollars continue to pour into their currency, commodity, and asset markets, with no clear end in sight...

I know that it is too much to ask Steil for an admission that the world market is not expecting a collapse of the dollar.

I know it is asking too much to expect him to tell his readers that the dollar's value today is right smack on the trend line it has been following since 1975 (with interruptions for the dollar bubble caused by the high interest rates triggered by the Reagan budget deficits, for the late-1990s strengthening of the dollar in the dot-com boom, and for the 2008 panicked flight to safety. As Larry Summers said earlier this month, to call for U.S. austerity right now is to commit a fundamental error:

Summers: The medicine depends on the disease.... [I]t is very different to have the disease... [that] no one from the rest of the world wants to lend you any money any more, and therefore your currency is collapsing.... [T]he crisis... more analogous to [today's] U.S. crisis than the crisis in Thailand, Korea, or Indonesia was the crisis that Japan had in the early 1990s.... [T]he American advice with respect to that crisis was strongly expansionary fiscal policy, and was strongly expansionary monetary policy...

And may I ask for an admission that we did not have a stagflationary breakout in 2010?

Benn Steil: December 28, 2009: [T]he Obama administration and the Federal Reserve are plowing forward with Plan B: Nationalize credit creation and "stimulate" the private sector by spending in its stead. Richard Nixon's famous line, "We're all Keynesians now" never seemed more apropos. With the budget deficit at an eye-popping $1.4 trillion, and on track to stay above$1 trillion indefinitely, Berkeley economist Brad DeLong writes breezily in his Nov. 30 blog that "anything that boosts the government's deficit over the next two years passes the benefit-cost test—anything at all." On the monetary side, the fireworks have been even more spectacular... the Fed has flooded the globe with newly conjured dollars in an unprecedented no-holds-barred effort to prod private credit expansion. Watching the booms in the markets... one might be forgiven for concluding that the Fed had succeeded well beyond its expectations, and that the market's flight to safety had given way to a flight to Vegas.... [T]he massive fiscal and monetary bailouts of the banks have served to worsen the credit misallocation that led to the general economic collapse in 2008.... [W]hat we're left with is the type of government-sponsored orgy of spending and money creation that Washington used to condemn with all-knowing righteousness when undertaken south of the border.... As we move into 2010, no doubt the horns will be blowing for the long-awaited U-shaped recovery. I suspect it won't be long before we realize we've drunk too much, and that the second dip of a W-shaped recession awaits us...

And may I ask for an admission that Frederic Bastiat was in favor of expansionary fiscal policy in a recession?

And for an acknowledgement that Jacques Rueff's "demolition" of Keynes's argument for fiscal policy was no such thing--that in fact on this issue Milton Friedman agreed with Keynes (Friedman just thought that monetary policy was as a rule much more effective than fiscal policy, and as a rule and in normal times it is)?

Benn Steil: Keynes and the Triumph of Hope Over Economics, February 6, 2009: [W]e call for trillion dollar stimulus plans on the basis of little more than citing John Maynard Keynes--and politicians revere us. Citing Keynes gives us special license to talk economics without using any. To paraphrase the lawyers' dictum, when the facts are on our side, we pound the facts; when theory is on our side, we pound theory; and when neither the facts nor theory are on our side, we pound Keynes--and to great effect.... [I]n the words of Frédéric Bastiat from 1848, "The bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen"--in other words, the long run. One of these good economists was Bastiat's fellow Frenchman Jacques Rueff, who in a 1947 journal article attacking The Fallacies of Lord Keynes's General Theory pointed out that governments "have a choice between only two solutions: to allow the apparatus of production to adapt itself to the structure which, by the movement of prices, the will of the consumers tends to impose upon it, or to adapt the desires of consumers by authoritative regulation to the structure of the productive apparatus which we do not propose to change". And insofar as the government's "investment programme diverts means of production from the areas where they are more desired to less useful employments, it will reduce the standard of living". But Nobel Prize-winner Paul Krugman, who calls today "The Keynesian Moment", justifies such a trillion dollar investment programme on precisely the Keynesian foundations that Rueff demolished--the claim that money "would otherwise be sitting idle". When Mr Krugman buys his stimulus bonds, I am curious where the "idle" money will come from. Will he sell stocks? Bonds? Withdraw funds from the banking system?...

And for an admission that the last thing the U.S. economy needed in August 2008 was tighter money and higher interest rates?

Benn Steil: August 18, 2008: We'll All Pay For the Fed's Loose Money Follies: [O]ne of the great attractions of inflation targeting was that it only appeared to constrain central bankers' discretion. Other objectives which today's central bankers actually think are far more important--in particular, keeping growth of that great aggregate of aggregates, "gross domestic product," above 0%--can be safely pursued in place of price stability. This is because the inflation target is what's called a "medium-term objective." The Fed is actually free to slash its key interest rate from 5.25% to 2%, stuffing the world with dollars, even as inflation soars past 5.6% (a 17-year high), because the public's inflation expectations will supposedly remain "well anchored"...

And for an admission that the Federal Reserve Board has not nine members but seven?

Benn Steil: October 30, 2007: The Federal Reserve’s dramatic 0.5 per cent interest rate cut on September 18 was greeted with euphoria in the stock market.... Nine smart folks at the Fed board have taken over the job of deciding what the price of money should be.... Jacques Rueff pointed out... people react to the “growing insolvency” of a reserve currency, such as the dollar, by acquiring “gold, land, houses, corporate shares, paintings and other works of art having an intrinsic value because of their scarcity”. Sounds familiar? Indeed, this is the story of our present decade.... Between August 2001 and August 2007, the dollar price of gold soared 144 per cent, while the CPI rose only 17 per cent.... [F]rom 1971 to 1975 and from 1977 to 1980. In both, the increase in the price of gold and other commodities presaged substantial increases in CPI inflation as well as significant falls in the international value of the dollar.... [G]old banks have risen in tandem with the dollar’s decline and offer the world a viable private alternative that has permanent intrinsic value. As the Fed debates whether the world is truly crying out for even cheaper dollars, it would be wise to heed the lessons of monetary history...