This is pretty funny. In the great debate over Bernanke, guys like Scott Sumner and Paul Krugman keep pointing at the bond market to show that guys like me are nuts for worrying about (price) inflation.
My strongest comeback is to point at commodities, and in particular the price of gold. After all, surely S&K aren’t going to argue that gold is up simply because of the increased demand for dental fillings in emerging markets.
So how do I deal with the undeniably low yields on US debt? Well, maybe the fact that the Fed has absorbed so much of it is one big factor. (Speaking of which: Does Krugman really think that bond yields would hardly move, even if the Fed not only stopped accumulating, but actually dumped its entire portfolio over the next month? I’m not asking that sarcastically.)
My other response is to say, “Gosh I don’t study these things as much as the professional bond traders, but I nonetheless think sovereign debt is in a bubble. A few years from now, I think we’ll look back at the collapse in bond prices and realize ‘the market’ was as deluded as during the housing bubble.”
Not entirely satisfactory responses, I’ll grant you, and I am actively refining my views on these things since the massive grocery store price inflation has not yet materialized as I was confident it would by now.
But in terms of grasping at straws, Krugman’s explanation for gold prices strikes me as downright silly. Whereas I can try to explain bond prices due to Ben Bernanke and his trillion-dollar-plus printing press, Krugman blames…Glenn Beck, with his radio and TV shows:
Kash, at the Street Light, has a very good post on the price of gold and its relationship or lack thereof to inflation fears. He points out that the market for gold is surprisingly small, so that it would take only a relatively small number of extra buyers to push the price way up, even when other, more direct measures of expected inflation remain low….
Surprisingly, though, Kash doesn’t say explicitly that this parallel is not at all hypothetical. Glenn Beck was financially intertwined with Goldline, and therefore had a financial stake in pushing fears of hyperinflation. And he had many, many viewers. So there was a direct channel through which conservative Americans were being pushed into buying gold.
Market prices almost always tell you something useful. But sometimes what they tell you is that there’s a marketing scam in progress.