Wherein Paul Krugman Drives Me Mad

I am no anti-Krugman Krank, and think the Nobel-winning economist continues to write some of the best practically-minded economic commentary out there, but this sort of thing from him drives me mad.

S&P declared that US debt is no longer a safe investment; yet investors are piling into US debt, not out of it, driving the 10-year interest rate below 2.4%. This amounts to a massive market rejection of S&P’s concerns.

via Aaauuuggghhh! Market Commentary Edition – NYTimes.com.

C’mon Paul. You know that’s utter bullshit.


  1. Paul: Do you have a counter-explanation for the rally in Treasuries today? It seems to me no one's really worried about U.S. default per se, though there may be knock-on effects to the downgrade. Munis, for instance, are flat today.

  2. Hookahboy says:

    Actually it makes perfect sense. You should talk to people who are trading in both markets, that's exactly what they would tell you. It's a massive rejection of 'let's get our debt and deficits under control by cutting govt. spending willy nilly and the economy will miraculously recover by itself' argument.

    • It's a massive rejection of 'let's get our debt and deficits under control by cutting govt. spending…
      I don't think so…it's just that the markets arlready have mostly priced in the governments ineptitude. An AA+ rating isn't bad enough to run away from the dollar on it's own as long as you believe the US will right the ship.

      We definitely should not fix the debt crisis 'willy nilly', but for the most part we have a real SPENDING problem, not a tax problem. We should cut about 20-30% across the board and then start worring about what to cancel. Later, we can figure out how to fix the bungled tax code.

  3. Honest question, Paul: why is it bullshit? The low rates have to indicate *something*; if it isn't confidence that they'll be paid off, then what? Just simple fear that literally nothing else will pay off?

  4. wallyfurthermore says:

    Paul is right. The view of the US as a relative safe harbor was unchanged by the S&P's view.

    If you really feel otherwise, you should explain in detail. You might start by explaining how the after-the-fact change of rationale is a legitimate way to rate.

    • I agree about safe harbor. S&P explaining themselves said their downgrade was about political dysfunction, not about debt (after the $2T error…), so in that sense the market is not rejecting the statement of S&P. That said, I, too, am a bit mystified by the PK of the first part's journey to madness.

  5. wallyfurthermore says:

    Paul is right. The view of the US as a relative safe harbor was unchanged by the S&P's view.

    The other Paul K. Not you.

  6. Wappledoo says:

    I think Luis has it — the US is better than a lot of other options, all of which are getting worse faster than we are.

    It would be just plain stupid to say that the obvious dysfunctionality of the US political system, as evidenced by the latest debacle, is not a strong indicator that eventual (long-term) default is more likely than it used to be.

    People are fleeing to US Treasuries because they don't have many other "safe" options. Many would say gold is overpriced, and the only other option really is Swiss francs, I guess. For safety and liquidity, nothing much beats Treasuries, even if you accept that the risk of default has gone from "minimal" to "low."

  7. pithhard says:

    Nothing against Paul Krugman, but awarding Nobel Prizes in economics makes about as much sense as awarding Nobel Prizes in tarot card reading. These guys contribute exactly nothing. They wrap their mumbo jumbo in a wrapper of statistics to make it appear quantitatively based and empirical. But in reality they never agree with each other and are invariably wrong on everything of importance.

    I think they should accept that nobody can predict markets with any certainty. Their only useful function is as specialized historians. I wouldn't give 2 cents for every Nobel Prize economist who ever lived. They should convert that prize to something real — perhaps math or computer science.

  8. Stealing Rosie's oft used comment the U.S treasury market is the "one eyed king in the land of the blind". Agree with Paul that Krugman is off his element here, the fact that yields have gone down is a function of the relative safety of U.S treasury compared to other options out there. With the Japanese and Swiss incursion in the FX market is it any wonder that people are piling into treasuries. Agreed that the downgrade means nothing, the ratings company's became irrelevant with the bust of 2008. The shellacking in equities is a function of valuations meeting fundamentals and is shortlived but you still cannot turn away from the fact that the U.S has a structural debt problem with no fix in sight.

  9. It's a bit more nuanced methinks. The market has not rejected S&P's concerns, it just continues to view Treasuries as "money-good" (meaning default is not a real world option) and suffers from a distinct lack of creative thinking at moment.

    There is also a distinct shortage of safe havens. If you hate stocks, hate $USD, hate E.M. risk and hate the euro, where are you going to put your cash? There is only so much room in the gold market, which bears the rough dimensions of a shoe closet in comparison to USTs.

  10. None of this seems surprising to me (an relatively unsophisticated mortgage guy). Almost any political action in the realm of possibility (spending cuts) will weaken the economy in the short term. If the S&P action carried any real weight in the intermediate term, it is to make the possibility of tax cuts slightly more palatable to the American people, which will also act to weaken growth rates. Since the debts will always be paid in nominal terms, if only by printing money, the only default risk is some degree of inflation spasm leading to a currency collapse. Since all the likely political actions brought on by the downgrade will weaken the economy, significant inflation in the short to medium terms is less likely today than it was on Friday.

    I told my clients not to worry Friday, just wait it out an lock today. That turned out to be very god advice.

  11. My point being that I wonder what Paul is trying to say? Elucidate, please? Is it all foreign buying?

  12. There is no contradiction between the two concepts of:

    1) US Treasuries have a higher risk of default today than last week (absolute)

    2) US Treasuries are the best risk option of the currently available (relative)

    Much of the ranting seems to me really logically nonsensical, but emotional – "How can you S&P guys say it's worse in absolute value if it's still the best relative value, HUH HUH HUH? Explain that to me, smart guys. Look at all the people who think it's a great relative value! So you gotta be wrong on the absolute value, har-de-har-har, you CDO-mortgage-rating monkeys!!!"

  13. wallyfurthermore says:

    I don't see that as logically nonsensical at all. It has always and will forever be about relative value, whether you are talking sovereign credit, gold, mortgage risk… name it. There is no such thing as 'absolute value'… the very term is a contradiction. Hence: Krugman is correct.

    • Huh? No such thing as "absolute value"? I suspect you're thinking of the word "value" in a different sense as I meant it – that is, you might be thinking of it in terms of the "worth" of an investment. I meant it in terms of the probability of being paid back. That ranges from 0% to 100%. S&P just said that the probability has dropped a little.

      I think what's going on is that the new risk premium that would now naively be applied – which is objectively, pretty small – is being swamped by the much larger turmoil of the prompting event itself. Counter-intuitive, yes, but not incomprehensible.

      Where Krugman's column is in error is here – "S&P declared that US debt is no longer a safe investment"

      No, they didn't say that. They said it's still a reasonably safe investment, but less so than before.
      Krugman does know this. I assume he's just really angry it all, which is extremely understandable.

  14. It's the warped logic of Krugman's explanation. Since treasury markets rallied and yields came down that's not a real concern for the market. It's the same market that rallied from 2005 – 2007 even when it's well understood by late 2005 & early 2006 that there was a housing bubble and lot of banks have bad loans on their books ( remember that).
    At that time he was countering many who said there was no bubble that " Market's rallying does not mean that there were no problems". Economists are experts in using the logic that best supports their conclusions
    ( selective perception)

  15. I have an explanation. US treasuries are governed by slightly different rules than many other bonds. For US financial institutions, they are treated as risk free even if they do not have an AAA rating. However, thousands of bonds – from munis to big insurers – depend on the governments AAA rating to keep their own AAA rating, These bonds are going to be downgraded (many of them already have been) so for investors that need the right reserved is AAA bonds, they have to sell and find an alternative.

    Really, the only market with enough capacity is US treasuries, which under regulations are considered risk free, even though they now have an AA rating.

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    From "How to Get Ahead in Advertising"

    Krugman never hesitates to trot out the snake oil when it suits his policy goals. I'd be krankier.