Paul Krugman. No link because the New York Times website has delinked my online account from my paper subscription:
[Wall Street Journal] May 29, 2009:
They’re back. We refer to the global investors once known as the bond vigilantes, who demanded higher Treasury bond yields from the late 1970s through the 1990s whenever inflation fears popped up, and as a result disciplined U.S. policy makers. The vigilantes vanished earlier this decade amid the credit mania, but they appear to be returning with a vengeance now that Congress and the Federal Reserve have flooded the world with dollars to beat the recession...
What does it take for a media outlet to be permanently disbarred from making economic commentary?
But here’s the thing: it wasn’t just the WSJ. Pundits, Very Serious Politicians, and more have spent the past two years plus doing everything they can to make the deficit the center of public discourse, to focus all our fears on the attack by bond vigilantes that was supposedly just over the horizon. And now it turns out that what really terrifies the markets, let alone the suffering unemployed, is the prospect of a second Great Depression — a prospect that has become much more likely thanks to the utter wrongness of elite policy priorities.
Great work, guys.
I don’t have time to do all the references, but here’s a quick summary of what Very Serious People have been saying over the past 2 1/2 years:
May 2009: Interest rates have risen on hopes of recovery, but lots of people claim that we’re seeing crowding out by government borrowing; the WSJ announces that the bond vigilantes, the “disciplinarians” of US policy, have arrived.
Fall 2009: Although rates keep refusing to soar, the story I hear is that it’s all because hedge funds are borrowing short and lending long, and that it’s going to end in grief any day now when this “carry trade” collapses. Obama goes on Fox and says that we have to cut the deficit or we’ll have a double dip.
May 2010: A slight rise in rates due to renewed optimism about recovery is described in news reports — and this is reported as a fact, not a speculation — as a sign of worries about US debt. Meanwhile, the OECD calls for immediate rate hikes.
Fall 2010-present: Despite the persistence of low rates, politicians and pundits state — again, as a fact, not a hypothesis — that we’re going to have a terrible crisis within 2 years if the deficit isn’t slashed.
Meanwhile, some us worked with a very different story: the Fed will determine short rates, and the long rate reflects expected future short rates. And the Fed will keep short rates near zero as long as the economy remains deeply depressed. So the long rate reflects beliefs about prospects for recovery, and hence of an eventual move off the zero-rate policy. According to this view, a weaker economy will push rates down even as it raises the deficit. And right now, with the 10-year rate at 2.19% — 2.19%! — the market is basically signaling that it doesn’t care a bit about the deficit, but that it’s terrified about growth prospects.
But I’m not a Serious Person.