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US Government Starting to Face a Cash Crunch

This Neil Irwin post is pretty good (I think I got this from Alex Tabarrok on Twitter):

[I]n the…market for Treasury bills, things are starting to get scary. These are short-term IOU’s of the U.S. government, bills issued for 30, 60 or 90 days. They enable Uncle Sam to manage cash flow much the way a homeowner might use a credit card. They also form the backbone of trillions of dollars in transactions: Major corporations and banks use them as a place to park short-term cash; they are held by money market mutual funds; and they serve as collateral for millions of transactions in markets around the world.

…[O]n Sept. 30, eight days ago, the interest rate on Treasury bills maturing Oct. 17 was a mere 0.03 percent. Nothing, in other words.

But since then, the possibility that the Treasury might have trouble paying or might not be able to pay its bills over the next few weeks has grown — and the interest rate has skyrocketed. It was at 0.16 percent at Monday’s close. On Tuesday the rate so far has been almost double that, as high as 0.297 percent.
…
Ironically, this can create self-fulfilling problems for the Treasury. Treasury bills roll over every week, on Thursdays. Here’s how it works: The government issues the bills for a “discount,” then refunds the par value when they come due. So, for example, an investor might pay $995 for a bill that returns $1,000 in three months, for an equivalent of about a 2 percent annual interest rate.

But if buyers don’t want to roll over their bills — if they don’t trust the government enough to pay the usual high price for that debt — then the government’s cash crunch becomes even more severe. If, for example, investors were only willing to pay $950 for a 90-day, $1,000 bill (about a 20 percent annualized interest rate), then the government would run into its legal debt limit even faster than it is now scheduled to. We’re nowhere near that point now. The rate has risen to 0.3 percent, not to single-digit, let alone double-digit, percent levels. But the abruptness of the move, in a market that usually is rock-solid and stable, is startling nonetheless.
…
In the 2008, post-Lehman Bros. crisis, major banks — even those that seemed to be fundamentally solvent — were facing a liquidity crisis, as short-term access to cash became a challenge. Buyers of Treasury bills have no evident concerns about the longer-term solvency of the United States. But the action on the bill market over the last several days, and especially Tuesday, looks like the early phase of a liquidity crisis.

So I’ll repeat my question for Keynesians: Why isn’t this at least a partially good thing, since it clearly gets us out of the liquidity trap? If the above trend continues, then clearly short-term nominal interest rates are no longer stuck against the zero lower bound.

In fact, why isn’t Krugman arguing that by definition, we can’t have a crisis unless interest rates rise, and yet if interest rates rise the Fed can gobble up bonds and push them back down? The only reason the Fed wouldn’t want to do that, is if (price) inflation starts rising, which will only happen once we’ve restored Aggregate Demand.

I have asked this three times now, and have yet to see a satisfactory explanation. Sure, the federal government will slash spending, but the Fed can counteract that by more expansionary policy. The only time this can’t happen–according to Krugman–is when we’re at the zero lower bound, and the central bank can’t offset fiscal austerity.

So I ask again: If we take the framework Krugman has developed over the last five years on his blog, how can a US government debt default possibly hurt the US economy?

Bryan Caplan Values His Body Far Too Cheaply

I was very much enjoying the latest skirmish between Tyler Cowen and Bryan Caplan–no matter who loses, I win–when I was astounded by this argument from Bryan, to drive home his point about how awful immigration restrictions are:

The obvious moral objection is that comparing slavery and immigration restrictions is absurd hyperbole. But it’s absurd hyperbole to call this apt comparison “absurd hyperbole.” Yes, enslaving a Haitian is plainly worse than forbidding him to accept a job offer anywhere on earth except Haiti. But they’re both dire harms. How would you react if the world’s laws barred you from every non-Haitian labor market on earth? With weeping and gnashing of teeth…

…Another helpful test: Suppose you had to choose between the following evils: (a) not being allowed to legally work anywhere but Haiti; or (b) being enslaved with probability X. What value of X makes you indifferent? My X=.33.

Say what?! All I need for my job is a good internet connection, which I imagine I could get in Haiti if I had to. And then on the weekends:

(BTW, I am quite aware of how awful certain parts of Haiti are.)

Niall Ferguson vs. Krugtron the Vincible (sic), Part I

Niall Ferguson has apparently started a series at HuffPo, documenting Paul Krugman’s botched predictions over the last several years. (In case you don’t know, Krugman has been absolutely vicious against NF for years now.) Obviously I am predisposed to love such an endeavor, and what’s really great is that Ferguson catches some things that I had missed.

(Before giving my favorite example, let me state that as far as I can tell, Brad DeLong / Krugman were right to pounce on Ferguson for one of his points regarding the CBO’s projections of debt/GDP. I wouldn’t bet my life on it, but it certainly seems that Ferguson switched between two types of scenarios from last year to this year’s CBO reports, making it seem as if the debt outlook had gotten worse over the last 12 months.)

Anyway, back to Ferguon’s HuffPo piece, his main theme is that Krugman has been repeatedly wrong about the euro. He claimed dozens of times that its breakup was coming, with increasing degrees of confidence and imminence. On top of that, he said people who disagreed with him were “delusional” etc. So by the standards Krugman uses against the “inflationistas”… well, you get the idea.

But the thing that made me laugh out loud was Ferguson’s handling of Krugman’s thoughts on Europe. So the below is Ferguson writing, with quotations from Krugman:

To begin with, Krugman was blithely confident that Europe would weather the economic storm better than the United States. On January 11, 2008, he hailed it as “The Comeback Continent”:

[KRUGMAN in Jan 2008:]… Since 2000, employment has actually grown a bit faster in Europe than in the United States … If you think Europe is a place where lots of able-bodied adults just sit at home collecting welfare checks, think again. … Europe’s economy looks a lot better now – both in absolute terms and compared with our economy – than it did a decade ago.

Krugman explained Europe’s comeback in terms of “deregulation”, a more competitive broadband market than the U.S., “strong social safety nets” and “very high taxes.” On May 19, 2008, after a visit to Berlin, he even told his faithful readers: “I have seen the future, and it works … in the heart of ‘old Europe’.”…

Finally, in December 2008, Krugman woke up to the fact that the “Comeback Continent” was in fact an “economic mess.” But what kind of mess?…The mess Krugman discerned was the failure of the German government to see “the need for a large, pan-European fiscal stimulus.” The main thing, he wrote in March 2009, was not to make the mistake of thinking that “big welfare states are … the cause of Europe’s current crisis. In fact … they’re actually a mitigating factor.” It was a theme he returned to when he and I debated the crisis in New York three months later, when he argued that “the human suffering [was] going to be much greater on this side of the Atlantic” because of Europe’s “strong social safety net.” Even in January 2010 he was still insisting that:

[KRUGMAN in Jan 2010:] The real lesson from Europe is actually the opposite of what conservatives claim: Europe is an economic success, and that success shows that social democracy works. … taking the longer view, the European economy works; it grows; it’s as dynamic, all in all, as our own.

All of this sheds (to say the least) interesting light on Krugman’s boast in an interview in March of this year to have been one of the few commentators who had “predicted the unfolding economic disaster in Europe.” This is by no means the only retrospective prediction Krugman has ever made, but it is surely the most shameless.

Good stuff.

Economics Basics: Action and Exchange

At the Mises Academy I’m starting a new class on October 17 on “Action and Exchange.” Full details here.

Louis CK Tells a Dog Story

Danny Sanchez posted this on Facebook (it was relevant to the thread), and I’m sharing it here because it illustrates why Louis CK is, in my humble opinion, the greatest living standup comedian. He doesn’t “tell jokes,” rather he tells stories about his actual life that are hilarious. Obviously he exaggerates for comedic effect but what makes his anecdotes hilarious is that they are so realistic, and his commentary is so brutally honest.

In contrast, you have very good standup comedians like, say, Sarah Silverman or Daniel Tosh, but they’re not nearly as enjoyable as Louis CK since they’re clearly putting on an act. They’re pretending (we hope!) to be the awful person depicted on the stage, but the basic joke is that they are much more awful than the average fan watching. But (to repeat) this isn’t what Louis CK does–he is hilarious because you know he actually means what he’s saying (except for slight exaggeration for comedic purposes).

Now if you really want to get technical, part of what makes this particular Louis CK clip so funny is his analysis of his dog’s perspective. The best example of this technique I can think of is Richard Pryor explaining his trip to the jungle. (Watch out, naughty words since it’s Richard Pryor standup.)

Outrage Over Outrage Over Government Shutdown: I’m Starting With the Man in the Mirror

(That’s not a typo in the title.)

Like most libertarians, I have been slightly amused by people freaking out over the government shutdown. Note, I’m not talking about people whose direct livelihood is affected, which includes not just federal employees but also DC-area cab drivers and restaurant owners. Rather, I’m talking about random commentators on the internet/media who are horrified at the principle of the federal government temporarily interrupting its production of greatness.

One knee-slapper is that without the government, human beings wouldn’t be able to enjoy a forest or mountain. (This reached absurdity when the federal Park Police tried to bar access to Mt. Vernon, even though it’s privately funded.)

Steve Landsburg pointed out another example, where somebody was complaining about not being able to get an export license as a problem of too little government. Steve pointed out, of course, that the reason the guy couldn’t export his merchandise was that government officials were actively preventing him from doing so; that’s not a problem of too little government. (In other words, it’s not as if Barbary pirates were barring the guy from international commerce, and he needed the US Navy to provide an escort if only John Boehner weren’t such a jerk.)

The same analysis applies to passport holdups and other inconveniences of that nature: The government says: “We will send guys with guns to your house and throw you in a cage if you don’t do XYZ,” and then when members of the ruling class get into a squabble, they make it literally impossible to do XYZ. Call that what you will, but it’s not a problem of anarchy.

OK, now that I hope I’ve convinced my libertarian readers of my bona fides, let me point out how my conscience dinged me on this topic. (I hate when that happens!) In the comments of Steve’s post, somebody wrote to Steve (who had been in his car listening to a radio story about the guy needing a license to export his wares):

So you’re in a car, on a road, driving safely in traffic, listening to a radio and complaining about government.

In a car, on a road, driving safely in traffic, listening to a radio.

Got it.

Does everyone see what this wiseguy is saying? He’s claiming that Steve is a hypocrite for making the point about export licenses, since he was (a) in a car, (b) driving safely, and (c) listening to a radio. I read this comment several times, and I’m 99% sure the guy is saying that there would be no cars, roads, traffic safety, or radios without the government, and so Steve needs to count his blessings before making some pedantic point about trade restrictions. Not only that, but the guy was being sarcastic about it, like his position was so self-evident that only an idiot could fail to see the irony of Steve objecting to trade restrictions from the comfort of his car.

So now that I hope I’ve reproduced similar feelings of outrage and annoyance among my libertarian readers, let me bring up something awkward: Our side does the exact same thing when left-wing anarchists protest capitalism, wearing clothes produced in foreign sweatshops and using cell phones to coordinate their movements. (I tried googling but couldn’t find an example, unfortunately.) So if you were (a) as annoyed as I was with Steve’s critic above, but (b) thought it was hilarious when the posters went around Facebook of 23-year-old socialists marching with products made by corporations, you might want to step back and amplify your tolerance for your fellow human beings.

Last point: Please don’t say: “Bob, we’re right and they’re wrong. Capitalism produces cell phones, and it could produce roads if only the government would let it. So that’s why our ridicule is funny, but theirs is stupid.” I don’t think that’s sufficient. The reason Steve’s critic is so annoying, is his smugness over what is a very debatable proposition. So by the same token, a left-wing anarchist could very understandably be upset at smug jokes and accusations of hypocrisy, the premise of which is that, “You need giant corporations and massive inequality in wealth in order to have cell phones.” They think that is a debatable proposition.

Bob of Christmas Past on Debt Ceiling

Back in July 2011 I recorded a commentary for Campaign for Liberty on (not) raising the debt ceiling. They recently re-ran it, saying the numbers were a little different today but the general points are still valid–and I agree. In particular, the claim that failure to raise the debt ceiling is the same thing as defaulting on the government’s outstanding debt is simply not true.

Krugman Points Out His Inconsistency on Default Risk Better Than I Could Have Done

I recently pointed out that Krugman’s September 25 commentary on the possibility of a US government default was at odds with his pooh-poohing of a debt crisis caused by bond vigilantes. I don’t think people really saw just how badly Krugman had painted himself into a corner, so I had planned on doing a mock “Krugman” post where I used his standard diagrammatic framework to show that right now, the full-employment nominal interest is negative, meaning we’re stuck in a liquidity trap recession. If the fear of a government default makes investors less willing to hold Treasuries, then the full-employment nominal interest rate rises and eventually goes positive, meaning the Fed can finally fix the economy using conventional monetary policy. Whew!

Well, I don’t really need to do any of this, because Krugman on October 3, in a post titled, “Phantom Crises (Wonkish),” does my work for me. Here are some excerpts:

…a loss of investor confidence driving up interest rates and plunging the economy into a deep slump.

As I’ve written before, I just don’t see how this is supposed to happen in a country with its own currency that doesn’t have a lot of foreign currency debt – especially if the country is currently in a liquidity trap, with monetary policy constrained by the zero lower bound on interest rates. You would think, given how many warnings have been issued about this possibility, that someone would have written down a simple model of the mechanics, but I have yet to see anything of the sort.

Let’s start with something like a canonical model – a model in which there’s an IS curve representing the effects of interest rates on demand, and monetary policy is described by some kind of Taylor rule. David Romer calls this the IS-MP model, and it looks something like this at a given point of time…

[KRUGMAN HAS A DIAGRAM.]
…

Now suppose that investors turn on your country for some reason. This can be represented as a decline in capital inflows at any given interest rate, so that the currency depreciates….

My point is that what sounds like a straightforward claim – that loss of foreign confidence causes a contractionary rise in interest rates – just doesn’t come out of anything like a standard model. If you want to claim that it will happen nonetheless, show me the model!
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Furthermore, as Wren-Lewis says, even if there is somehow a squeeze on long-term bonds, why can’t the central bank just buy them up? Yes, this is “printing money” – but when you’re in a liquidity trap, that doesn’t matter…

I know that many people find this line of argument, in which a loss of investor confidence is if anything expansionary, deeply counterintuitive. But macro, and especially liquidity trap macro, tends to be like that. So don’t give me your gut feelings; give me a coherent story about who does what, i.e. a model. I eagerly await a response.

Now in fairness, Krugman (of course) isn’t talking about the US and the possibility of a default in the above. Rather, he’s talking about Great Britain and why they don’t need to implement “austerity,” even if we thought investors would turn on them.

But the logic is the same. I put the crucial sentence in bold in the above. There’s nothing in Krugman’s argument that means a loss of confidence because of obstinate Republicans is different from a loss of confidence because of profligate Democrats.

At BEST, Krugman should be saying the following:

==> ON ROGOFF-TYPE FEARS: “Well, the drop in investor confidence would be expansionary. However, to the extent that the attack of the bond vigilantes made it harder to borrow money, the government might have to cut spending, and that would be bad. So we’d have to assess which force would be stronger, and I predict the former would outweigh the latter, meaning the economy would be helped on net.”

==> ON BOEHNER ET AL.: “Well, if the government can’t borrow more money, obviously there will be an immediate slash in spending, which will be awful for the economy. However, the silver lining is that the crash in the bond markets will actually be expansionary and promote exports. So that will cushion the blow. I predict the former would outweigh the latter, meaning the economy would be hurt on net.”

Yet Krugman never did anything like the above. Nope, when it comes to people recommending “austerity” to quell the possibility of a bond vigilante attack, Krugman says it would be expansionary, end of story. Then, when it comes to the Republicans and the debt fight, Krugman says: “But for sure we should be looking at a plunging dollar, and probably carnage in the stock market too.”

Now in context there, 99% of Krugman’s readers are going to think a “plunging dollar” is a horrible consequence of those rascally Republicans. And yet, Krugman elsewhere argues that a plunging dollar is great to promote exports.