13 Nov 2012

No Dr. Krugman, a Treasury Crash Would Be Bad for the US Economy

Debt, Economics, Krugman, Shameless Self-Promotion 23 Comments

This is my article today at The American Conservative. Let me just quote what Krugman is saying, to entice you to read my response. There’s a bit of a plot twist in the article, so I don’t want to spoil the fun by quoting it here. Anyway here’s Krugman:

[Krugman writing:] We know what a loss of faith in Greek bonds looked like: interest rates soared, with negative consequences for the Greek economy. But Greece didn’t have its own currency, and therefore didn’t have its own monetary policy or its own exchange rate. We do. So what would an attack by invisible bond vigilantes look like for the United States… ?

[W]hat happens if there’s a loss of confidence, causing the risk premium [on US government debt] to rise? The answer is that the currency depreciates for any given domestic interest rate, increasing demand…That is, the effect on the economy is expansionary.

Think about is this way: with the Fed setting interest rates, any loss of confidence in US bonds would cause not a rise in rates but a fall in the dollar—and a fall in the dollar would be a good thing, helping make US industry more competitive.

So if you want to see me pick apart the above, click here.

23 Responses to “No Dr. Krugman, a Treasury Crash Would Be Bad for the US Economy”

  1. Matt Tanous says:

    I don’t think Krugman contradicting himself counts as a “plot twist” any more. It’s no “he was dead the whole time”, at least.

    • Bob Murphy says:

      I read fiscal austerians. Sometimes, they don’t even know they’re fiscal austerians.

  2. Major_Freedom says:

    I would have clicked on your article even if you posted it here verbatim. 🙂

    I know what’s what.

  3. Andrew Keen says:


    Paul’s definitely not going to debate you if you keep closing the circles in all his arguments.

  4. skylien says:

    A loss of trust in creditworthiness is good for the US? How hard can it be?

  5. Major_Freedom says:


    Should an anarchist be OK with a treasury crash, if it was tied up with abolition of the state?

    Saying a treasury market crash would be bad for the economy kind of sort of perhaps implies that there ought not be a treasury market crash. But if there is not a treasury market crash, then that implies the existence of government debt, which implies the existence of government.

    I’m torn between agreeing with Krugman that a treasury market collapse would be good for the economy, and disagreeing with his reasons, and agreeing with your criticism of Krugman’s reasons, but disagreeing with you as an anarchist.

    Where to go?

    • Bob Murphy says:

      MF yeah I wondered about that too. After all I’m intrigued by Jeff Hummel’s suggestion that a government default would be a good thing.

      With all this stuff we have to specify our baseline. Krugman isn’t saying, “A Treasury crash is good because then the US breaks up into 50 fiefdoms.” Rather, he’s saying it’s good because then it allows the Fed to inflate more without resorting to wacky unconventional QE, but good old fashioned rate targeting. He is saying that other things equal, it would help if the Fed had to print more money to suppress interest rates, than it currently does.

      I agree that if the Treasury crash leads to Rothbardian bliss, then it can be blissful.

      It’s like with the natural disaster stuff. Krugman was wrong for saying it can be good for the economy for reason X. We pointed out how dumb that was. But we didn’t prove a natural disaster per se is necessarily bad for the economy. What if a mild earthquake opens up a crevice that shows us a bunch of diamonds? That makes us wealthier! Woo hoo!

    • Jason B says:

      The problem, MF, is would the abolition of the central state occur via a treasury crash? My guess, and that’s all it is, is no. I figure the CIA/Pentagon already has some contingencies or protocols for when that time comes. And who knows how Congress handles it. Do they just reset their computers, tell the bond holders to go kick rocks, and then just carry on with their usual treachery? I can certainly see secessions, like Vermont, NH, Texas, and Alaska, which would be probably be intriguing.

      I think the initial crash would be horrendous for the economy, I’m just not sure what outcomes stem from that to form any opinion about whether it would be good considering the plethora of circumstances I can hypothesize about such a collapse.

      • Bob Murphy says:

        I don’t know if this matters, guys, but Krugman is saying the Fed would start buying the bonds. You think that’s wrong? The ECB bails out its governments, but the Fed would sit back and let the US descend into Rothbardian anarchy? I’m not seeing why they would do that.

        • Major_Freedom says:

          OK, so strictly speaking then, it’s not a collapse in the treasury market per se that is bad for the economy, it’s the Fed’s likely reaction to it that is bad.

          Is that fair?

          • Bob Murphy says:

            Yep good clarification MF. You’re right, if we just isolated it and said do you want investors around the world to keep lending to the USG or not, I would want them to stop, and I think that would (all else equal) be a good thing because it would force a balanced budget on the government. But then if the government is allowed to print money in response, and jack up tax rates, it would be pretty bad.

            There’s a short vs. long term thing going on too, and you could get into that. But that’s not what Krugman was saying. He wasn’t saying, “Let’s pop the bubble now and get it over with instead of letting it fester.” No, he was saying it would actually boost employment and make us feel richer right now if all of a sudden investors stopped wanting to lend to the USG, and I don’t see that at all. It would be an awful year even if Ron Paul were president.

            • Tel says:

              I kind of agree we are at the “what happens is what happens” stage and it doesn’t make a huge difference what the President does right now (presuming any President who can win an election will also deliver the “same” you can believe in).

            • Jason B says:

              I was under the impression that Bernanke is stuck, which is why he keeps going to Congress saying, “get your deficits straightened out”. U.S. corporations are flush with cash. And Americans’ savings are in much better shape than they were during the bubble. Eventually, even with the regulatory burden of Obamacare, they’ll start investing that money, and people might start spending, along with improving employment. Couldn’t that potentially bring upon some solid inflation? But if the interest on the debt is currently right around half a trillion per year, and we get some inflation, and bond holders slow their purchases, then what does Bernanke do? He can’t start buying bonds, the inflation will blow up. And he can’t raise interest rates, because then half the tax revenues will be consumed purely by the interest on the debt, which could trigger a treasury crash. I just can’t see how inflation is going to make things better.

              • Jason B says:

                Basically I figured Bernanke is gonna be faced with either an inflation problem, or a treasury market problem. I guess it could possibly be both. The one great thing about it is that there is no way anyone can possibly blame any of it on free market capitalism.

            • Major_Freedom says:

              On page 5 of Krugman’s 6 page .pdf article, he concludes:

              “Think about it this way: with the Fed setting interest rates, any loss of confidence in U.S. bonds would cause not a rise in rates but a fall in the dollar – and a fall in the dollar would be a good thing, helping make US industry more competitive.”

              Krugman is essentially treating a treasury collapse the same way he is treating a fake alien invasion, or war, or natural disasters:

              Whatever can influence the Fed to print more money and increase “AD”, is (under certain circumstances – which are sometimes mentioned and sometimes not) a “good” thing.


              To picture this in Three Stooges format, it is like Curly being in charge of a money printing press, and Moe hitting him repeatedly with head bops to make sure he is printing enough dollars (imagine the sound of a hammer hitting a piece of hollow wood). Krugman is laughing hysterically at the scene, but when asked about it, he says that he is technically against hitting people over the head, he just believes that Moe hitting Curly is sometimes the only way Curly will do the job right. Krugman would scoff at you if you suggested he is actually pining for head bopping.

    • Tel says:

      That was exactly my feeling as well… and I’m not even an anarchist!

      The point being that we all know the current system can’t work as advertised for much longer, something has to give right? The real questions are where will the breaking point be, and how and when.

      At least with a treasury crash, the lingering uncertainty will be gone… we will know where it breaks, right at that point. On the other hand, a lot of short term hardship will result, probably to a lot of people who didn’t really deserve it.

      More likely they will go for the inflation path, and QE3 fits in with that, so the debt ceiling just goes up and up. I’d say inflation is locked in at this stage, but there’s a simultaneous transition of government takeover pretty much everywhere — healthcare, auto-industry, banking, food stamps, and close ties between the Obama administration and the union movement.

  6. anon says:

    Bob, I’m pretty sure, Krugman was talking about the value of the dollar going down relative to other countries and so lowering the trade deficit by stimulating our economy with more exports.

    It’s weird that Peter Schiff agrees the trade deficit is a problem but that a lowered valued dollar would bad. (Maybe he thinks both are bad, but what does he want? An even higher valued dollar? To keep the dollar high as long as possible? That would be weird since he claims one of the problems with the trade deficit is that we’re losing our manufacturing capabilities.)

    The relevant debate seems to be about the short term costs of higher import prices and whether the lowered valued dollar will make up for this cost with increased employment from higher exports.

    It’s strange you characterize the inflation debate as at a standstill because treasuries may be a bubble. It’s not as if Krugman doesn’t think higher inflation is possible. In fact he wants higher inflation. If inflation got out of hand do you really think Krugman would think it was no big deal? Schiff has been warning of high inflation since at least 2002 and not just inflation, but hyperinflation since the stimulus.

    What’s interesting is the solution of Austrian economists. Schiff is warning of disaster, but his recipe is what? Liquidation and depression? Dean Baker wrote about the housing bubble in 2002 with actual data and said the problem would be to make up for the lost demand.

    There’s a difference between higher inflation, high inflation, and hyperinflation. If inflation increases and the economy doesn’t improve I imagine that Krugman would change his view. Either we really have structural unemployment or a supply shock or rational expectations is 100 percent right and sticky prices is 100 percent wrong.

    What’s weird is that higher prices for domestically made goods means higher incomes (or profits) as well. Some people will be hurt by this, but not everyone. The case against inflation (besides so-called moral problems) is that it’s inefficient and therefore costly and that higher expected inflation can lead to “accelerating” inflation or higher future inflation, possibly necessitating offsetting Fed action.

    What Krugman wrote on hyperinflation, while true, was in the context of a debate with the MMT crowd. I think that was maybe him doing some hippie punching as I don’t know anyone who thinks we should run 100 billion dollar a month deficits with high inflation. If inflation got out of hand and we didn’t have access to a bond market we could (supposedly) still raise the lending rate with interest on reserves. (I think some people say that the Fed affiliated banks have to buy treasuries if we want them to. I don’t know if this is true though.) We could also raise taxes to curb spending if it came to it. (We could do labor “reform” too or alternatively the supposedly abhorrent income, price controls and or rationing depending on your view)

    When you talk about him not qualifying his wonky paper. That may be for two reasons: 1. If he thinks the trade deficit is unsustainable. 2. At full-employment we should not be running deficits anyway, so why exactly would access to the bond market matter? (If there is a reason, I’d honestly like to know. Not being snarky.)

    • anon says:

      Just wanted to add that it very well could be the price of Gold that’s a bubble. (Although you could say the trade deficit is a bubble, I’m not sure it makes much sense to say treasuries and the dollar are bubbles. What matters is the fundamentals (new trade theory?) and whether we’re investing enough domestically and/or making up for leak in demand if we’re not at full employment.)

    • Bob Murphy says:

      2. At full-employment we should not be running deficits anyway,

      Have you seen the Medicare projections? There will be humongous deficits over the next several decades even at full employment.

      • anon says:

        Well, Dean Baker is always saying that if our medical costs were in line with other countries we’d be facing surpluses not deficits, but aren’t higher medical costs a problem for the private economy too?

        Also, recently he’s been saying that the trend in growth of medical costs has slowed, although I’m not sure why.

      • anon says:

        Anyway I meant “ideally” we would not run deficits at full employment, as in that Krugman says he’d be a “fiscal hawk” at full employment so that he’d wouldn’t be advocating deficits but perhaps “Medicare” reform.

        I was just wondering why with a balanced budget, surplus, or at least declining debt to GDP we’d need to be overly worried about confidence.

      • anon says:

        Sorry, last thing. A large trade deficit may entail higher deficits itself in order to maintain full employment if the private sector is not willing to borrow and invest more to offset the leak in demand to high savings countries like China.

  7. Max says:

    This is one of your better Krugman takedowns. Well done.

    What Krugman should have said is we shouldn’t fear a treasury crash because if it happens, it will almost certainly be because of *increased* confidence in the U.S. government – specifically, increased confidence in the government’s ability to generate (or at least tolerate) an economic boom.

    Not because of fear that the government can’t “pay its debts”!

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