Krugman’s blog, 10/8/15

There were three posts yesterday.  The first was “The China Debt Fizzle:”

Remember the dire threat posed by our financial dependence on China? A few years ago it was all over the media, generally stated not as a hypothesis but as a fact. Obviously, terrible things would happen if China stopped buying our debt, or worse yet, started to sell off its holdings. Interest rates would soar and the U.S economy would plunge, right? Indeed, that great monetary expert Admiral Mullen was widely quoted as declaring that debt was our biggest security threat. Anyone who suggested that we didn’t actually need to worry about a China selloff was considered weird and irresponsible.

Well, don’t tell anyone, but the much-feared event is happening now. As China tries to prop up the yuan in the face of capital flight, it’s selling lots of U.S. debt; so are other emerging markets. And the effect on U.S. interest rates so far has been … nothing.

Who could have predicted such a thing? Well, me. And not just me: anyone who seriously thought through the economics of the situation, with the world awash in excess saving and the U.S. in a liquidity trap, quickly realized that the whole China-debt scare story was nonsense. But as I said, this wasn’t even reported as a debate; the threat of Chinese debt holdings was reported as fact.

And of course those who got this completely wrong have learned nothing from the experience.

The second post yesterday was “Prudence is Folly:”

Larry Summers calls for fiscal expansion, and rails (though he doesn’t use the term) against the Very Serious People, denouncing the fixation on structural reform:

Traditional approaches of focusing on sound government finance, increased supply potential and the avoidance of inflation court disaster … It is an irony of today’s secular stagnation that what is conventionally regarded as imprudent offers the only prudent way forward.

Quite. It’s now seven years since I warned that we had entered a world in which

virtue becomes vice, caution is risky and prudence is folly.

And we’re still in that world. I’m really glad to see Larry saying similar things, buttressed by the growing evidence that we’re facing a secular lack of adequate demand. I wish I believed it would matter.

Yesterday’s last post was “Flimflam Fever:”

Apparently desperate Republicans are pleading with Paul Ryan to become Speaker of the House, because he’s “super, super smart.” More than anyone else in his caucus, he has the reputation of being a brilliant policy wonk.

And that tells you even more about the dire state of the GOP. After all, Ryan is to policy wonkery what Carly Fiorina is to corporate management: brilliant at selling himself, hopeless at actually doing the job. Lest we forget, his much-vaunted budget plan proved, on even superficial examination, to be a ludicrous mess of magic asterisks. His big contribution to discussion of economic policy was his stern warning to Ben Bernanke that quantitative easing would “debase the dollar”, that rising commodity prices in early 2011 presaged a surge in inflation. This guy’s delusions of expertise should be considered funny.

Yet he may indeed be the best they have.

Nonetheless, it would be a huge mistake for him personally to take the job. Where he is, he can cultivate his wonk image, with nobody in the press willing to disturb the illusion. In a direct leadership role, he’d have no place to hide.

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