(Before I jump into the blog post, here is the latest Contra Krugman episode.)
On a previous post I pointed out the irony that progressives are flipping out about Trump’s remarks on a Treasury default, when back in 2012 Krugman et al. were scratching their heads trying to even come up with a model in which an attack from the “invisible bond vigilantes” could possibly hurt the U.S. economy (e.g. here).
Now perhaps I should have clarified: Obviously Krugman and Matt Yglesias right now are NOT endorsing Trump’s ideas; they’re saying he’s a nutjob who would wreck the world economy (or at least Yglesias has explicitly said that).
My point is that these claims do not fit with their rosy assessment back in 2012 of an attack from investors who were worried about the huge debt Obama was piling up. Back then, they couldn’t even imagine a scenario in which that would hurt the U.S. economy.
Suppose investors do start dumping treasury bonds and interest rates rise. Where does the money go?
Well it could go into private domestic investments, which would boost the economy. Or it go into foreign financial assets, which would reduce the value of the dollar and boost the economy by bolstering exporting and import-competing firms. Higher interest rates have historically caused recessions because the Federal Reserve wasdeliberately using high interest rates as a tool for inducing recessions because they thought higher unemployment would quash worker demands for higher wages and keep inflation under control. An exogenous reduction in the global investment community’s inclination to hold treasury bonds could reduce American doctors’ ability to take that trip to Paris they’ve been dreaming of this spring, but couldn’t induce a recession.
Now in the comments from my recent post, Scott Sumner was incredulous. He said he couldn’t even see why I thought these two trains of thought had anything to do with each other.
Really? Scott, talk me down from the ledge and spare me public humiliation. I’m thinking someone who wrote the above paragraph can’t plausibly now claim that Trump’s careless talk about a Treasury default would wreck the economy, without at least a nod to the above forces that were so benign back in 2012 when the issue was Obama’s trillion-dollar deficits.
Absent a compelling explanation from Scott or someone else, I’m going to town with this.