Krugman’s blog, 8/14/15

There were two posts yesterday.  The first was “Rate Hike Fever:”

How central bankers see themselves
How central bankers see themselves

Larry Summers argues that a Fed rate hike would be a big mistake; I completely agree. Yet he also suggests that the Fed “seems set” to do this foolish thing. Why?

What’s odd about this debate is that it’s not like debating monetary policy with the seventeen stooges conservatives whose doctrine tells them that fiat money will turn us into Zimbabwe any day now, and are impervious to evidence. The Fed chair is Janet Yellen; the vice chair is Stan Fischer; both are, as Brad DeLong emphasizes, salt-water economists whose underlying macro worldview is surely very much like Larry’s, or mine, not least because we studied under Stan himself. So why the difference on policy?

Surely it has something to do with where people are sitting; something about being on the inside is making the Fedsters more rate-hike prone than those of us on the outside. It might be regular contact with Wall Street types — but Larry actually has plenty of that too. I don’t think it’s extra information: basically the Fed knows no more than anyone keeping reasonably close tabs on the economy, whatever snippets of supposed inside info it may get, and I believe that Janet and Stan are smart and level-headed enough to get that.

Pressure from the usual suspects — the constant sniping against easy money — may play a role. But I also suspect that a lot has to do with the urge to resume a conventional central-banker role. The whole culture of central banks involves saying no to stuff people want, taking away the punch bowl as the party gets going, having the courage to do unpopular things; everyone wants to be Paul Volcker. The Fed is really, really eager to return to that position — and is, I fear, engaging in wishful thinking, believing much too readily that a return to normalcy is appropriate.

It’s not. I’m with Larry here: this attitude has the makings of a big mistake. Think Japan 2000; think ECB 2011; think Sweden. Don’t do it.

Yesterday’s second post was “Stupid China Stories:”

So a stock crash in China triggered a big decline around the world, while I was trying to have a personal life (and succeeding, actually). Leaving aside whether this really made sense, why should events in China matter for the rest of us?

Well, you and I might think that it’s because China is a pretty big economy — a huge buyer of commodities and a significant importer of manufactured inputs too. So when China slumps, you can and should expect knock-on effects elsewhere.

But trust the Republican field to declare that it’s all Obama’s fault. Scott Walker wants Obama to cancel a state dinner with Xi; Donald Trump says that it’s because Obama has let China “dictate the agenda” (no, I have no idea what he thinks he means). And Chris Christie says that it’s because Obama has gotten us deep into China’s debt.

Actually, let’s play a bit with that last one, OK? You could, conceivably, tell a story in which America becomes dependent on Chinese loans; then, when China gets in trouble, it demands repayment, pushing us into crisis too. But any story along those lines has a corollary: we should be seeing a spike in US interest rates as our credit line gets pulled. What you actually see is falling rates:

10-year Treasury
10 Year Treasury, Bloomberg News

Oh, why am I even bothering?

But remember: all the experts said that the GOP had an unusually strong field, a very deep bench, a lot of talent running for president.


One Response to “Krugman’s blog, 8/14/15”

  1. Barton, Barton and More Barton Says:

    The market expanded and the emerging nations sold shares. Housing stagnated. The Chinese ran a muck and attributed their balance of payments to their productivity curve. Oil stood at its ledge and glanced at the sheer joy of the XL pipeline. The Afgan and Iraqi wars were winding down. And the market still climbed. We heard of planes and trains and puppy dog tails.The market stood still and they waited. After nearly five years of errant lending the Chinese threw in the towel. Blaming the Fed they sounded like terrorists and rapists blaming the victim. The Fed sounded the horn. They saw home prices and they bought.

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