This is my article today at The American Conservative. Let me just quote what Krugman is saying, to entice you to read my response. There’s a bit of a plot twist in the article, so I don’t want to spoil the fun by quoting it here. Anyway here’s Krugman:
[Krugman writing:] We know what a loss of faith in Greek bonds looked like: interest rates soared, with negative consequences for the Greek economy. But Greece didn’t have its own currency, and therefore didn’t have its own monetary policy or its own exchange rate. We do. So what would an attack by invisible bond vigilantes look like for the United States… ?
[W]hat happens if there’s a loss of confidence, causing the risk premium [on US government debt] to rise? The answer is that the currency depreciates for any given domestic interest rate, increasing demand…That is, the effect on the economy is expansionary.
Think about is this way: with the Fed setting interest rates, any loss of confidence in US bonds would cause not a rise in rates but a fall in the dollar—and a fall in the dollar would be a good thing, helping make US industry more competitive.
So if you want to see me pick apart the above, click here.