In addition to claiming that the bond vigilants are invisible (i.e. nonexistent), Paul Krugman has also argued that even if investors around the world suddenly lost confidence in Treasury bonds (because of fears over Uncle Sam’s profligacy), it would actually be good for the economy. For Krugman’s argument to apply, a country needs to (a) have excess capacity, (b) have its own currency, and (c) have debts largely denominated in that currency. These conditions apply to the US and Japan, which is why Krugman quite clearly said that these two economies would benefit if investors suddenly lost confidence in their bonds.
In this context, what are we to say of the situation in Turkey, where the central bank just jacked up interest rates quite sharply to stem the depreciation of its currency? Well, it issues its own currency (the Turkish lira), and its unemployment rate hit 9.9% in December 2013, slightly higher than the annual average rate (according to IMF) of 9.8% in 2011. (It had fallen in 2012.) Meanwhile, just eyeballing the chart from this forex website, the lira fell against the USD by easily 10 percent over that period (it depends when you start), not counting the rapid plunge this month.
Does the Turkish government / central bank have a lot of foreign-denominated liabilities? I have no idea. But at the very least, it looks like we now have to add Turkey to the list of countries (such as Greece) where Krugman et al. will need to explain why, “It can’t happen here.”
In case anyone is curious, here is a screenshot of Turkish consumer price inflation rates and unemployment rates, from 2001 to 2012, from the IMF:
What does the above data mean? Who knows? I can definitely tell you an Austrian story where the above data are just what we’d expect to see, and Krugman can definitely tell you a Keynesian story that does the same thing.