01 Oct 2013

A Tale of Two Krugmans

Krugman 43 Comments

When it comes to investors worrying about the federal government paying its debts, Krugman says it is the best of times, and the worst of times, depending on whether it’s due to big-spending liberal Democrats (best of times) or budget-slashing conservative Republicans (worst of times).

When writing a somewhat technical piece in November 2012 about the power of bond vigilantes to suddenly realize the debt was a problem, Krugman said that even if this happened (which he doubted), it would rescue the economy from the liquidity trap first. To be sure I’m not misquoting him, I’ll post from a follow-up blog where Krugman clarified his position:

A skeptical correspondent asks whether I really truly believe what I’m saying in my post about how an attack by the bond vigilantes is actually expansionary when you have your own floating currency. How does this jibe with the experience of the Asian financial crisis of the 1980s, he asks? And do I really believe that Japan would be better off if markets became less confident in the value of its bonds?

Good questions — but ones that I and others have already answered.

On financial crises past: the key question is whether you have large debt denominated in foreign currency…

The point, of course, is that America doesn’t have a lot of foreign-currency debt. Neither does Japan — which is why I would say yes, reduced confidence in Japanese bonds would actually help their economy.Right now, as I’ve written in the past, the collision of deflation with the zero lower bound means that Japan actually offers investors a higher real interest rate than they can get in other advanced countries. The result is a strong yen that is really hurting Japanese manufacturing. Some loss of faith in those Japanese bonds, whether default risk or fear of higher inflation, would be a blessing. [Bold added.]

Everyone got that? As of last November, a loss of faith in Japanese (and American) government bonds, even if due to fear of default, would be a blessing.

Well then, you would think Krugman would be excited by the prospect of the Republicans causing fear of default and thus blessing the economy, right? Of course not. Here’s a good example of Krugman’s commentary on the most recent “debt crisis,” this one from September 25, 2013:

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. The best story I’ve heard came from a government official who put it something like this: “Business types come to Washington, and they talk to Boehner, or Paul Ryan, or Eric Cantor – all of whom are very hard line, but not insane. So they go home reassured. What they don’t realize is that those guys aren’t in control, and that they’re running scared of a large faction of the party that is indeed insane.”

That makes sense to me; if 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.

What everyone stresses is that U.S. government debt, until now regarded as the ultimate safe asset, suddenly becomes not so safe. That could drive up short-term interest rates, at least a bit, because T-bills could start to trade at a discount relative to cash. Although maybe not. Is there a reason the Fed can’t serve as bond buyer of last resort, standing ready to buy T-bills at par, so they remain fully liquid?

Meanwhile, what about long-term interest rates? A lot of people seem to assume that they’ll go up, because who’ll buy debt that might face delays in payment? But see above. Meanwhile, think about the macro impact. Here’s federal receipts and outlays:


If the feds are forced to slash spending, one way or another (and probably semi-randomly) to match receipts, that’s about $600 billion in cuts at an annual rate, or 4 percent of GDP. That’s a huge case of unintended austerity, quite aside from the disruptions, surely enough to push us back into recession if it lasts for any length of time.

And a double-dip recession would, in turn, push back the date of Fed rate increases far into the future, which would normally cause a big drop in long-term rates.

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.

I quoted the entire post above, so there’s no doubts about me taking him out of context.

As just about always with Krugman, he can pull the shark repellant from his utility belt to get out of this particular jam. He can make some assumptions about what government spending would do if the bond vigilantes attacked because of large debts versus attacked because the Republicans refused to raise the debt ceiling, blah blah blah. But the crucial point is that back in November, when he wanted to pooh-pooh the people warning about investors suddenly doubting the US government’s ability to pay off its bonds, Krugman didn’t say one word about the government having to slash spending in such a scenario. No, it was all about the counterintuitive result that our economy would be helped by such an outcome.

Now, when he wants to attack Republicans for threatening a debt default in the fight over ObamaCare, Krugman doesn’t even devote a sentence to the technical paper he showcased for his readers back in November, explaining how Krugman thinks about a debt default in a modern economy with its own fiat-denominated debts. Instead, he focuses on the attendant slash in spending and how this will cause a double dip recession and “carnage.”

Sometimes the newcomer is confused by the apparent randomness in Krugman’s posts, about when he makes certain assumptions and when he makes others, and when he focuses on effect X while at other times he focuses on effect Y. But there actually is a pattern… I’ll leave it as an exercise to the reader.

43 Responses to “A Tale of Two Krugmans”

  1. Cosmo Kramer says:

    “I quoted the entire post above, so there’s no doubts about me taking him out of context. ”

    Then they will say that the quoted post was in the context of another post. They’ll say that both of your quotes weren’t made in the same context. You are evil. How dare you.

    I’ve quoted entire posts and still been accused of “cherry picking” and taking out of context.

    RPM, you can’t win. You can play this game honestly and win the hearts and minds of non-bigots.

    • valueprax says:

      Cosmo Kramer,

      That begs a few questions, namely:

      1.) What objective criteria can we use to decide who is a bigot and who is just confused or misguided (and what if it’s us)? Otherwise, we risk becoming like them and accusing anyone who disagrees with us of being bigoted.
      2.) Is the best approach for the non-bigots to spend years of our life picking apart the irrationalities of the bigots, or is it to simply put forward a logical, positive alternative to the bigot’s program? Even if we successfully refute the bigots, we still have to give a positive program in opposition, couldn’t we skip a step and go straight to logically outlining our program (please note, I am not suggesting “policy” recommendations here)
      3.) When facing down a confirmed bigot, what is the best approach? Pat them on the head and say, “Poor little bigot” and smile and walk away? Give them a logical argument and walk away? Push them out of a helicopter into the middle of the ocean? (That is a JOKE… a sick joke, but a joke. I don’t expect the bigots to be humored by it, however.)

      • Cosmo Kramer says:

        Great questions.

        Bigot: a person who is obstinately or intolerantly devoted to his or her own opinions and prejudices

        1) Might I say we are all bigoted? I am intolerant to many things. There are tasks in my work that I refuse to do any other way. In the economic realm I spend most of my time studying conflicting points of view. So I’d say the very act of questioning yourself and seeing other p.o.v’s (as they would see things) is a way to rule out being bigoted in an area.

        2) I mostly ignore bigots, and this includes those that HAPPEN to agree with me. I think the best course is to put forth one’s views and reference the views of others.

        I completely see how liberals in my family come to the conclusions they do in reference to social welfare. Are they really wrong? I have the view that they are wrong but know that many well-informed non-bigots share those views.

        3) It is pointless to debate with them on topic that they are bigoted in/on, just as I don’t enjoy talking with bigots that happen to agree with me. I’d rather focus on opening their eyes. It should be a constant effort to question one’s beliefs.

        You can’t prove to this person that they are wrong. You can’t prove to this person that they constantly spew non-truths.
        YT: /watch?v=g-GAX77iwBs

        My response: There isn’t a single individual in congress that is anti-government. Republicans had full control for many years under Bush….. did government evaporate? The only thing we can do is inform those that are willing to listen.

  2. Prateek says:

    Hey Bob, I always had a question which I wanted to ask you. If you were appointed the next fed chairman with complete power….what would be the monetary policies you would follow..and what would you do with interest rates?

    • I ain't Bob says:

      I don’t know what Bob would do, but I know what I would do: I would abolish the federal reserve. I would remove from society the ability to have a monetary policy or arbitrary interest rate set by dictate.

      • Bob Robertson says:

        Bravo! Abolish the Fed.

        That would lead to a quick, sharp recession as people liquidated what isn’t profitable, and then we could all get back to being productive.

        Productive within the limits of the Fed.gov which, at last, would be incapable of printing its own budget, and would have to raise taxes, which has its own natural limits.

  3. joe says:

    He does not say that reduced confidence in American bonds would help the economy. He says reduced confidence in Japanese bonds would help their economy by making the Yen weaker. This is not true of American bonds because treasuries are used to meet capital requirements and when treasuries get weaker, credit tightens so the dollar would get stronger rather than weaker when confidence in treasuries falls.

    • Bob Murphy says:

      Joe, you are just making stuff up. These are the first two paragraphs from Krugman’s technical paper:

      Although warnings about an imminent attack on the United States by bond vigilantes have proved
      wrong again and again, they haven’t stopped. Declarations that any day now we might turn into Greece
      keep coming – and to be fair, not only from the Beltway deficit peacocks. And it is indeed conceivable
      that international investors might at some point become less sanguine about U.S. debt.
      But then what? We know what a loss of faith in Greek debt 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 a country like the United States (or for that matter the UK)?

      If you’re saying that his conclusions don’t apply to the US, then Krugman is being incredibly dishonest with the whole demonstration. So you pick: Is Krugman a shyster, or are you just making up excuses here?

  4. Daniel Kuehn says:

    I confess I haven’t read this in detail – I just have an active Google Alert for “shark repellant”.

    Have you considered that maybe the alternative to Krugman ALWAYS having a sneaky way out is that perhaps you rarely ever had him caught in the first place? The cognitive requirements we’d have to assume on Krugman’s behalf for always having a get of jail free card in any number of different arguments seems much higher than the cognitive requirements for him just having weak fare for criticism in the first place. At the very least the latter explanation has Occam’s razor going for it.

    Just a thought.

    As always, I’m just poking you hear. I follow you because you’re very sharp. But there have got to be diminishing returns in the production of Krugman criticisms, right? By birth or trading I feel compelled to assume diminishing returns and this case is no exception.

    • valueprax says:

      The Occam’s razor on the former is that Krugman spews fallacy everytime he opens his mouth, which is why he always is creating sneaky get-out-of-jail-free cards for himself.

      In other words, he is wrong.

      He is wrong. 3 words.

      He is right. 3 words.

      Oops, maybe Occam’s razor doesn’t work here for either side…

      • Daniel Kuehn says:

        Occam’s razor fail.

        You really think it’s a simpler explanation to say that widely cited and celebrated economist that even critics recognize as a top notch economic mind spews fallacy every time he opens his mouth?

        • Ken B says:

          The sad thing is that he really DOES think that. The standard assumption from the resident rothbardian claque, of which valueprax is a member in good standing, is that all their adversaries know but deny their own error and perfidy.

          • valueprax says:

            Ken B,

            Great one! And this isn’t the standard line of reasoning trotted out by the Resident Krugmanites as well, is it? That they know better but they’re just evil so they deny their errors?

            It must be fun thinking you’re the world’s sole objective thinker and everyone else is a bigot. Actually, it IS fun, because that’s what we’re all up to here, isn’t it? Maybe Marx was right after all…

            Btw, what’s a claque? Is that a really, really evil and notorious clique-cult? Or just an honest typo? Can you make an honest mistake when you’re an evil villain impervious to your own errors?

            I am so amazed by the way that DK didn’t turn this into a distracted argument about what Occam’s razor really states and how it’s really used and let me just boil it down to the idea that whoever can state their position in the fewest words possible has the simplest explanation, rather than who has the fewest assumptions. I left that out there as an opportunity for him to avoid the obvious but I guess he managed to do that anyway by trying to argue that “a widely cited and celebrated economist that even critics recognize as a top notch economic mind” is a valid assumption for an argument based on the “top notch”-ness of his economic mind…

            • Ken B says:

              ‘claque’ is in the dictionary. I do make a lot of typos, but that wasn’t one of them.

              • valueprax says:

                Oh nice, I should’ve checked that. So, a sophisticated way of saying I am an intellectual sell-out.

                btw do you have a reference point or link for me to investigate that lays out your hatred of The Great Rothbard? Somehow I always come across people like you in the middle of your disgust and I never know what the seed was for this foul harvest.

              • Ken B says:

                The short answer valueprax is that I’ve been watching Rothbardians scuff up the word libertarian and unwittingly smudge the cause of freedom for 20 some years.

              • valueprax says:

                Do you have ANYTHING that deftly summarizes or encapsulates the point that I could read? It’s hard to evaluate your position when I have no idea what it is, and I guess I am too daft in my own reading of Rothbard up to this point to have any clue what you might be referring to.

              • Ken B says:

                Markets do a superb job of allocating commodities and resources with alternative uses.
                To work markets require property rights, and they can function well where property rights are defined.
                It is tempting to think then that if we extend the notion of property we can use the market to find good solutions to more problems.
                An example would be allowing people to sell their kidneys.
                I generally endorse that approach.
                Some go further and argue that *all* rights are property rights ands should be traded in the market.
                That is wrong, transparently so, and the attempt to push that agenda does harm to the more reasonable and rational attempts to promote markets, choice, and freedom.
                It is hard enough arguing against the Candian health system without being associated with those who see public sidewalks as oppression but would let roving bands of thugs sell their services to the highest bidder, or argue that starving babies is no crime.

              • valueprax says:

                What does “let” mean here? Who is “letting” someone commit crime?

              • valueprax says:

                Not to waste your time digging up quotes but is there something specific from Rothbard’s writings you could point me to so I could understand how you came to the conclusion that Rothbard believes it’s “okay” to be a criminal for hire? Or that Rothbard advocated starving babies?

              • valueprax says:

                No thanks Lord Trash, I’ve read all your garbage before. Take that dumping ground elsewhere, it stinks.

              • Tel says:

                Some go further and argue that *all* rights are property rights ands should be traded in the market.
                That is wrong, transparently so, and the attempt to push that agenda does harm to the more reasonable and rational attempts to promote markets, choice, and freedom.

                I think this can be summed up as: “Some things should not be traded,” and I agree that Capitalism has it’s limitation down that road at some point.

                For example, it’s very difficult for me to accept the idea that a court should sell its judgement to the highest bidder, regardless of the facts of the case. The whole idea of a justice system is to go through the facts from a disinterested perspective.

          • valueprax says:

            For the record, I will say that I abandoned “good and evil” theorizing awhile back. I think it’s an aspect of the religious mind that has no place in a rational man’s world. Meaningless, empty concepts that imply objective value judgments which don’t exist.

            I think a lot of people make errors in reasoning and are unable to see them because:

            1.) Their reasoning skills aren’t finely tuned enough to do so (which would be some kind of neuro-biological-genetic thing that I don’t know the exact mechanics of but still feel comfortable describing awareness of its general effects)
            2.) They are emotionally traumatized and unwilling to accept the consequences of a given rational line of inquiry because they find accepting that reality is to be so to be more uncomfortable than the mental backflipping required to stop short and go in a circuitous route over and over again in front of the goal line

            What concerns me are the areas of intellectual inquiry where I might suffer from #1 or #2. And I’ve tried to think if there are things like #3, #4, etc., but so far I haven’t come up with anything (maybe I am suffering from #1 and/or #2 already?!). I’d invite and encourage you to clue me in on other explanations though as I’d like to consider them (if I am capable of doing so).

            So, no, I don’t think a person making a mistake knows they’ve made a mistake and I think even if it were the case that they could admit, in some part of their mind, that what they are saying isn’t true, and say it anyway, I would assume that was a result of emotional trauma, not “evil intent”, whatever that means or implies.

            Just makes me feel bad for the person, whatever they went through to be in such a terrifying place. I’m more of a Carnegiest than a Rothbardian in this regard (according to your portrayal of THE GREAT ROTHBARD)… I don’t think bank robbers or the Stalins and Maos of the world see themselves as villains, but heroes, generally speaking.

            • John says:

              Are you Major Freedom? I’ve been wondering where that guy went. I actually thought he was usually right if incredibly long-winded and repetitive.

              • valueprax says:

                No, I’m not. I think MF is still around, not sure what you mean about where did he go. Also, I once tried to contact him privately and asked him to email me and then I realized after someone emailed me that I had no way to verify it was “the real Major_Freedom”, so that sucked.

              • Major_Freedom says:

                I’m trying to figure out a way for me to confirm my pseudo-identity, using this public forum.

                I confess I am not clever enough to know how to do it.

                BTW, that was the real me that emailed you. Of course, it would be difficult for me to prove that, because a “fake” me could be writing this right now.

                But then I think if a “fake” me writes on this blog, then the “real” me would likely speak out about being spoofed.

                Why can’t you just say what you want to say here? I am only interested in debating the issues anyway.

              • Anonymous says:


                If you want to autheticate your pseudo identity, get yourself a pgp key and publish it around here.

              • valueprax says:


                Because I wanted to ask you “personal” questions that go beyond debating the issues on this blog. Just like if I met a really sexy woman I might eventually want to explore what else there is to her personality besides her sexy body.

                Your argumentation style is the sexy body I admire. I just wanted to see what kind of “personality” was behind it.

                This is getting very much more personal than I intended, very quick!!

                Your “real” email address was… kind of idiotic sounding. That’s why I thought someone was jus’ messin’ with me. Maybe Lord Keynes, or one of his henchmen, trying to have a good laugh at my expense.

                (Btw, is it funny for a democratic socialist like LK to highlight the LORD Keynes variety of the man’s name? The trappings of monarchy and feudalism adorning a man of the people?)

              • Bob Murphy says:

                Because I wanted to ask you “personal” questions that go beyond debating the issues on this blog.

                This comment made me increasingly uncomfortable the more I read it.

              • valueprax says:


                I am happy to be of service and also hope my antics will be of some inspiration to you in your next video production. At the current rate of creative evolution I believe it’s only a matter of time before you cross-dress in one of your videos (not that there’s anything wrong with that!)

                It seems to be a comedic horizon that every enthusiast approaches at some point in his career.

              • Ken B says:

                Bob M: “This comment made me increasingly uncomfortable the more I read it.”


        • valueprax says:

          I came up with a good simile here, I think.

          “You really think it’s a simpler explanation to say that the widely cited and celebrated Father of the Roman Catholic Church that even critics recognize as a top notch Christian mind spews [fallacious religious beliefs posing as factual descriptions of the real world] every time he opens his mouth?”

          For thousands of years people thought fairies existed and that the god(s) were responsible for influencing real factors on planet earth. Respectable people. Widely cited people. People with authority and power.

          And then rational people woke up and said, “Wait a minute… that’s a bunch of bullshit” (Bob excluded, or, I guess he did the opposite since he went from youthful atheism to religiosity).

          Fallacious delusions can persist for long periods of time, they can be widely accepted and they can be touted by even the most esteemed intellectual personages.

          That doesn’t make them any less fallacious. And so, Occam’s razor here falls on the side of the simplest explanation which is that Krugman is just wrong, and that’s why he’s always giving himself a way out.

      • Daniel Kuehn says:

        It’s POSSIBLE of course. Don’t confuse my claim. But it requires far more heroic assumptions.

    • Tom says:

      Krugman constantly checking himself to be sure that he always has an out despite knowingly spouting sophistry certainly fails the Occuam’s razor test. (As flawed a test when it comes to human behavior as that is).

      However, another simple explanation is that Bob is incredibly fair in his criticism and spends as much time considering Krugman’s point of view as he spends on his own. Meanwhile the same consideration to Murphy’s arguments is not given from his critics as they are much more concerned with seeming right than being right.

    • Major_Freedom says:

      “perhaps you rarely ever had him caught in the first place”

      Murphy catches Krugman all the time, for those who are honest enough to see it.

  5. Dirk says:

    I may be missing something but this seems to be entirely two different contexts.
    1. reduced confidence in a government to be able to pay its debt and therefore a raise in the interest rate (which Krugman claims can be a good thing in certain situations).
    2. reduced spending due to not raising the debt ceiling or a government shutdown.

    You mention this and just wave it off with a “blah blah blah”, but this is a hardly something you can just brush off.

  6. Ryan Murphy says:

    This is a good criticism.

  7. Anonymous says:

    how well would the US economy fair from weakened dollars and increased exports exactly? How much productive capacity do we even have to export anymore? I guess i’m saying if he gives two practically opposite scenarios, is either of them likely? or neither?

    when the fed buys treasury bonds, do they show up in the debt figure? or are they just ignored since they probably wont be paid back anyway?

  8. Gamble says:

    Liars lie and some of them happen to be Princeton educated…

    • Gamble says:

      Excuse me, not directly educated at Princeton but associated. Krugman and the Great Bernanke.

  9. Tel says:

    Although maybe not. Is there a reason the Fed can’t serve as bond buyer of last resort, standing ready to buy T-bills at par, so they remain fully liquid?

    \Since that’s already happening, the answer is demonstrably no.

    The question is more a matter of how long it can continue.

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