Krugman’s Blog, 1/28/13

There were 2 posts yesterday.  First came “Ratings and Rates:”

The interest rate on U.S. long term debt is up a bit, briefly breaking above 2 percent today. So, is this reflecting worries about US debt sustainability?

Of course not — and by now it seems that even financial reporters get it. The main cause of the slight uptick, according to news reports, was a better-than-expected durable goods number, which brings marginally closer the day when the Fed might finally start raising rates. In other words, it was economic optimism, not pessimism, behind the rate rise.

And according to the FT Alphaville post linked above, a second reason may have been a statement by Fitch that a US downgrade is less likely. That’s right, reduced fears of a downgrade lead to higher, not lower, US borrowing costs.

Why? Because scare talk from the rating agencies feeds the deficit scolds, making destructive austerity more likely, and therefore pushing back the date when the Fed might raise rates. You might say that the only thing we have to fear from the rating agencies is fear itself — not market fear, because the bond markets don’t seem to care, but political fear, the instinctive tendency to overreact to talk of bond vigilantes.

All of which is just a bit more evidence that everything the Very Serious People have been saying about confidence and the bond markets is wrong.

The second post of the day was “Failures:”

I didn’t see Meet the Press, and there doesn’t seem to be a transcript available yes, but I hear that Paul Ryan declared it a proven fact that Keynesian economics has failed — and was, of course, not challenged on that assertion.

Consider it, if you like, more evidence of the right-wing bubble. Outside that bubble, a fair number of people have noticed that Keynesian economics has performed spectacularly in the crisis — it successfully predicted that deficits wouldn’t drive up interest rates, that monetary expansion wouldn’t be inflationary, that austerity policies in Britain and elsewhere would hit economic growth. And no, don’t tell me that Keynesians predicted that the Obama stimulus would produce full employment; serious Keynesians, like me, were more or less frantically warning back in early 2009 that the stimulus was too small.

But in Ryan’s world everyone knows that Keynesian economics has failed.

Meanwhile, you know what has actually failed? Ryan’s Paulite/Randite monetary economics. You may recall that two years ago Ryan led the charge of Republicans demanding that Ben Bernanke stop his expansionary policies, issuing dire warnings about rising interest rates and soaring inflation. What actually happened:

So, how have Ryan and those of like mind reacted to the spectacular failure of their doctrine in practice? As far as I can tell, they haven’t even acknowledged that they have a problem.



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