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4 Jun, 2009

Krugman, Ferguson spar over T-Bills

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According to Slate, Ferguson and his allies believe that the rising bond yields prove that markets are worried about the inflation that will inevitably result from the fiscal policies of the Obama administration and the Fed. Given the large deficits and rising concerns about the viability of Social Security and Medicare, Ferguson writes, “It is hardly surprising, then, that the bond market is quailing. For only on Planet Econ-101 (the standard macroeconomics course drummed into every U.S. undergraduate) could such a tidal wave of debt issuance exert ‘no upward pressure on interest rates.

Krugman and his allies couldn’t disagree more. Far from being a sign of failure and impending disaster, they say, the rising bond yields actually signal success and impending improvement. Government bonds were so low last December because the world’s investors were totally freaked out about risk. They sold everything—U.S. stocks, emerging market government bonds, corporate bonds in Europe, Indian stocks—and parked their cash in the safest, most liquid investment around: U.S. government bonds. In the months since then, as the stimulus and bailouts have helped stabilize the economy, investors have started to relax.

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