FT.com / Columnists / Martin Wolf - Rising government bond rates prove policy ... - The Diigo Meta page

• 04 Jun 09
  

  Jason Welker

  Is the US (and a number of other high-income countries) on the road to fiscal Armageddon? Are recent jumps in government bond rates proof that investors are worried about fiscal prospects? My answers to these questions are: No and No. This does not mean there is no reason for worry. It is rather that there are powerful arguments against fiscal retrenchment right now and strong reasons for welcoming recent moves in the bond markets.
  
  Last week, the Financial Times carried two columns arguing that the US fiscal path was unsustainable, one by Stanford University’s John Taylor and the other by the Harvard historian Niall Ferguson. The latter, in turn, was a comment on a debate with, among others, the New York Times columnist and Nobel laureate Paul Krugman at the end of April.
  
  On one point all serious analysts agree: public debt cannot rise, relative to gross domestic product, without limit. To embark on fiscal stimulus in the short run, one must be credible in the long run.
  
  So what is the disagreement? Prof Ferguson made three propositions: first, the recent rise in US government bond rates shows that the bond market is “quailing” before the government’s huge issuance; second, huge fiscal deficits are both unnecessary and counterproductive; and, finally, there is reason to fear an inflationary outcome. These are widely held views. Are they right?
  
  The first point is, on the evidence, wrong.

  economics

• 03 Jun 09
  

  victor53 luk
• 

  Bengt Mettinger
  • Fear of deflationary meltdown has gone. Hurrah!
  • : crowding out of private borrowers? This would show itself in rising real interest rates. Again, the evidence is overwhelmingly to the contrary.
  • 12 more annotations...
  • • The most recent yield on Tips is below 2 per cent, while that on UK index-linked securities is close to 1 per cent
    • Now turn to the fiscal policy. The argument advanced by opponents is either that fiscal policy is always unnecessary and ineffective or, as Prof Ferguson suggests, redundant, because this is not a “Great Depression”
    • monetary policy, while important, becomes less effective when interest rates are zero. It is then wise to wear both monetary belt and fiscal braces.
    • At present, therefore, fiscal deficits are not crowding the private sector out. They are crowding it in, instead, by supporting demand, which sustains jobs and profits.
    • Prof Ferguson argues that fiscal expansion was unnecessary because this is only a mild recession.
    • hy it is only a mild recession,
    • he answer, in part, is the aggressive monetary policies of central banks and the rescue of the financial system
    • do not tighten fiscal policy too soon.
    • the fear of inflation
    • People need to believe that the extraordinarily aggressive monetary and fiscal policies of today will be reversed. If they do not believe this, there could well be a big upsurge in inflationary expectations long before the world economy has recovered. If that were to happen, policymakers would be caught in a painful squeeze and the world might indeed end up in 1970s-style stagflation.
    • policymakers are walking a tightrope: on one side are premature withdrawal and a return to deep recession; on the other side are soaring inflationary expectations and stagflation.
    • choose sharp tightening, but not yet.

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