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Krugman: More Idiocy

“The stupid, it burns:”

In his Friday column, Krugman writes that there “definitely” is no bond bubble and is “probably not” a stock bubble, either.

….

“The Fed normally cuts rates when unemployment is high and inflation is low — which is the situation today. True, it can’t cut rates any further because they’re already near zero and can’t go lower. (Otherwise investors would just sit on cash.) But it’s hard to see why the Fed should raise rates until unemployment falls a lot and/or inflation surges, and there’s no hint in the data that anything like that is going to happen for years to come.”

“The fatal error in this analysis is the belief that The Fed actually controls rates.

It does not.

This is not to mean that The Fed cannot influence rates, but it is axiomatic that in order to control a thing you must be the market for that thing.

The problem with being “the market” for Treasuries (which The Fed currently is!) comes about when you start thinking about monetary policy and flows in terms of what is actually going on here.

The two embedded assumptions in this belief are (1) The Fed can continue doing this until it decides to stop and (2) when it stops, whether through chocie or force, you will not be stuck with a huge capital loss.

The second is mathematically impossible since yields must rise when The Fed stops (“there is very strong support at zero”; ergo, they will not fall.)”

Via Market Ticker

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Categories: Economy
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