Sunday, May 8, 2011

Mankiw Piece

I like this piece by Mankiw in the Sunday NYT. Mankiw knows what he doesn't know. What we don't know is whether Krugman knows that he doesn't know, or doesn't know that he doesn't know.


  1. Posted on the same day Krugman posts a paean to Hume....

  2. ...and couldn't resist going off in support of irrationality.

  3. It's just a fact that economic math can express everything that can be said in economics, and there is nothing that the math can't say, so Mankiw must be wrong.


  4. Actually a rather clumsy and dishonest piece of concern trolling. Two of the three questions he asks are of the have-you-stopped-beating-your-wife variety: the premises on which the questions rest are far more important than the questions themselves. "How long will inflation expectations remain anchored?" "How long will the bond market trust the United States?" Please. If he wants to argue that hyperinflation is imminent or that the market is pricing bonds incorrectly, let him make the case directly, rather than wrapping these arguments in a cloak of feigned modesty.

  5. Mankiw goes out of his way not to offend, the correct stance if you want to get work in Washington. He's not sticking his neck out, but you can read between the lines.

  6. Anon 5:43,

    What are you talking about? The US faces an unsustainable fiscal situation. Currently, markets do not expect inflation and they expect that our democratic process will come up with a solution to the fiscal situation.

    Mankiw raises the very reasonable questions of how long markets will continue to believe these things in the absence of actual solutions.

    I fail to see what is remotely dishonest about this. I can only imagine what you think the situation is. Why don't you explain your views instead of taking drive-bys at Mankiw.

  7. Chris, irresponsible political conduct is good for bonds because it increases unemployment and in turn makes it less likely that the Fed will raise interest rates. The bond market cares not one whit about debt/GDP ratios. It only cares what interest rate the Fed will choose.

  8. anonymous,

    If you are an active participant in bond markets, that is great. As a government bondholder, I do care about debt/GDP ratios, and I hope to make a killing trading against people like you.

  9. Anon 12:49, I must echo Steve's comment. It is true that debt/GDP ratios have no effect on bond yields, as long as the govt's ultimate ability to pay is not threatened. Currently, the US is on an unsustainable path. If it is not changed, the US must/will default. Now that might take many years but it will happen. There is a threshold relationship.

    Let me draw an analogy. My life insurance company is indifferent between whether I weigh 160 lbs or 165 lbs because my probability of dying is essentially unaffected by that. If I were to weigh 460 lbs, I would be uninsurable -- or close to it. The heavier I get -- after a threshold -- the higher my rates go and eventually they won't sell me insurance at any price less than the payout.

  10. Anon 12:49, Let me anticipate one more objection that is going around. There is a school of thought that says that the US govt need never default on USD obligations because it can alway print USD.

    This is true in some sense but it misses the point of what would happen if the US govt tried that: US govt prints USD; US money supply increases; inflation and inflation expectations rise; nominal interest rates shoot up; US govt has to print even more money to pay higher interest rates; cycle ends in hyperinflation and loss of the use of money in the US.

    BTW, current US monetary policy is not doing that -- despite what some people say -- but that is a story for another day.

  11. "As a government bondholder, I do care about debt/GDP ratios"

    So is it that you are for the higher debt/GDP?

  12. "So is it that you are for the higher debt/GDP?"

    Steve means that -- after a certain point -- higher debt/GDP raises the risk of govt default, which means that bond buyers will require a higher yield on the govt bonds that they buy.

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