Sometimes the cognitive dissonance in Krugman’s mind could power a small city. As regular readers know, I was going nuts during the debt ceiling standoff, because Krugman was parroting the standard talking points as if a default would be a disaster. For example he wrote on September 25:
Add me to the chorus of those puzzled by the lack of market alarm over the possibility of U.S. default, induced by failure to raise the debt ceiling….[I]f most political reporters are still in denial over the real state of affairs, one can imagine that businesspeople are having an even harder time realizing the extent to which the inmates have taken over the asylum.
But suppose that markets were giving the possibility of default the attention it deserves; how should they be reacting? That’s not actually all that obvious, at least as far as interest rates are concerned.
…So I’m not at all sure that we’re looking at an interest rate spike; maybe even the opposite.
But for sure we should be looking at a plunging dollar, and probably carnage in the stock market too. [Bold added.]
Now the thing that was interesting, was that in the part I omitted, Krugman walks through his analysis that the Fed could sop up the bonds that investors no longer want to hold, thus pinning short-term interest rates down. In short, he gives the exact same analysis that he had deployed earlier, to explain why an attack by the bond vigilantes on the US would actually be expansionary.
So the thing that troubled me, was that Krugman never devoted a single sentence during the debt ceiling standoff to this “silver lining.” He never said, for example, “Sure, it will be bad if the feds have to slash spending, but at least we’ll get the expansionary kick from a plunging dollar and a higher nominal natural interest rate.” This wasn’t just my nitpicking; Tyler Cowen picked up the discrepancy too.
Now, literally the day after the crisis is formally averted, Krugman is back to his old line. He writes:
Matthew Yglesias notes an uptick in Very Serious People warning that China might lose confidence in America and start dumping our bonds. He focuses on China’s motives, which is useful. But the crucial point, which he touches on only briefly at the end, is that whatever China’s motives, the Chinese wouldn’t hurt us if they dumped our bonds — in fact, it would probably be good for America.
But, you say, wouldn’t China selling our bonds send interest rates up and depress the U.S. economy? I’ve been writing about this issue a lot in various guises, and have yet to see any coherent explanation of how it’s supposed to work.
Think about it: China selling our bonds wouldn’t drive up short-term interest rates, which are set by the Fed. It’s not clear why it would drive up long-term rates, either, since these mainly reflect expected short-term rates. And even if Chinese sales somehow put a squeeze on longer maturities, the Fed could just engage in more quantitative easing and buy those bonds up.
It’s true that China could, possibly, depress the value of the dollar. But that would be good for America!
The persistence of scaremongering about Chinese confidence is a remarkable thing: it continues to be what Very Serious People say, even though it literally makes no sense at all. As Dean Baker once put it, China has an empty water pistol pointed at our head. [Bold added.]
Now let’s see: In the last month, who has been engaged in scaremongering about the world credit markets not having confidence in U.S. government bonds? Who was warning people that the market was underrating the risk of a plunging dollar?
If Will Ferrell were an economist, I think at this point he’d ask, “Doesn’t anyone notice this?!”
UPDATE: Wow, this is a worse Kontradiction that I at first realized. If you actually click through to read Yglesias’ discussion–which prompted Krugman’s post above–then you’ll see that Yglesias specifically was placing his remarks in the context of the debt ceiling standoff. In other words, Yglesias was saying (my paraphrase), “The worry warts about China dumping our bonds are really in high gear now, because of the debt ceiling shenanigans. But they fail to see that if those shenanigans had made China dump our bonds, it wouldn’t have hurt us.” Then Krugman, in response to Yglesias, was saying (my paraphrase), “Right, but Matt isn’t taking it far enough. As I’ve been saying for a long time now, if China dumped our bonds, that would if anything help our economy because a falling dollar would boost net exports.”
So I hope you realize just how nutty this is, when Krugman a mere three weeks earlier had warned that the idiot Tea Party Republicans were going to possibly cause a debt default, which would lead to a plunging dollar and carnage in the stock market.