I’m actually in a hotel room right now, and I need to stop hammering Krugman on the bond vigilante stuff. But I see Gene Callahan misunderstood the point of one of my recent posts, and so perhaps I need to step back and explain why this whole thing is so frustrating.
Krugman is saying that we need to show him a historical example of a country in exactly the same circumstances as the US today that suffered from a bond vigilante attack, before he’ll take the deficit scolds seriously. So this rules out all sorts of obvious examples of countries suffering from a bond vigilante attack, and arguably it rules out all examples. But Krugman’s rules for eligibility restrict things to a handful of countries during liquidity crises. Does someone want to come up with an estimate of the percentage of “country-years” for this eligibility? In other words, Krugman basically needs us to show him an example of the US, UK, Japan, and … ? suffering from a bond vigilante attack, at a time when interest rates were 0%, from 1971 onward, or during the interwar period when the major powers were still off gold. If we can’t come up with an example from this incredibly restricted sample of world history, we lose.
Beyond throwing out 99% (?) of the data, though, there’s something more insidious going on here: Krugman is telling us that a bond vigilante attack can’t harm us so long as interest rates are at 0%. Sure, once we leave the liquidity trap, then we might face hyperinflation–Krugman himself tells us this. But so long as we’re still in the liquidity trap, no problem. It’s not even theoretically possible that a bond strike can hurt.
Does everyone see why this is a really really bad argument? Remember that for Krugman, a liquidity trap is defined as a situation with high unemployment and 0% interest rates.