12 Jul 2010

Betting on Deflation

Economics, Federal Reserve, Financial Economics 3 Comments

Krugman has been on the warpath the last few days, confirming my suspicion that my email is tapped. I had just told Jeff Tucker that I was done writing Mises Daily submissions for a while (I still have a bunch in the queue), and then BAM Krugman starts writing about Hayek.

Anyway in this post Krugman is (understandably) patting himself on the back about being right on interest rates and price inflation. As I’ve said before, I’m going to defer talk about CPI movements until I finish studying the Japanese Lost Decade. But in the meantime check out this from Wikipedia (which I found when looking up something prompted by reader Jacques Fournier):

In addition to the debt increase required to fund government spending in excess of tax revenues during a given year, some Treasury securities issued in prior years mature and must be “rolled-over” or replaced with new security issuance. During the financial crisis, the Treasury issued a sizable amount of relatively shorter-term debt, which caused the average maturity on total Treasury debt to reach a 25-year low of just more than 50 months in 2009. As of late 2009, roughly 43% of U.S. public debt needed to be rolled over within 12 months, the highest proportion since the mid-1980s.

That’s rather alarming, if the inflation-fear-mongers end up being right (and just off on their timing). Suppose price inflation starts kicking in and the Fed jacks up short-term interest rates. Before, I had been thinking only in terms of financing new debt issues. But if that quote is right (and still in the ballpark), that means more than $3 trillion in federal debt held by the public would need to be rolled over at a higher APR too, within a year of the hike.

3 Responses to “Betting on Deflation”

  1. von Pepe says:

    And so, the government goes on to violate Mises’ Golden Rule and risks the country by funding short-term.

  2. LvMIenthusiast says:

    Interesting…I wonder when price inflation will start to kick in. But, for now I guess we will have to make do with mainstream economists blithering uncontrollably about deflation and how the government must intervene more!

  3. Edward says:

    Hi Bob,

    Would you consider discussing why Mish Shedlock’s call for deflation is wrong? He argues that we must look at money supply plus credit in the system to determine if we are expanding or contracting. He makes a very strong and logical case for deflation and I would like to hear your thoughts on this subject.