'The Invisible Bond Vigilantes Continue Their Invisible Attack
'Ten-year bond rate now down to 3.05 percent. Clearly, we must slash spending immediately to satisfy the market’s demands!'
Paul Krugman is not an economist I always agree with - despite his being a nice person and a generally liberal voice. His interpretation of Keynes as being primarily about budget deficits is not an accurate presentation of Keynes. And, a related issue, his claim that the main driving force of the US economic downturn was not a decline in investment, which he made in discussion when I was on a panel with him in Shanghai, has been confirmed to be wrong. However he is entirely right on one key issue - that the US budget deficit, in present economic conditions, would not lead to a rise in US interest rates. The idea that in the circumstance of a deep recession in the US the budget deficit would lead to 'crowding out' of other demand for capital, which is what the idea that the budget deficit will lead to high interest rates is based on, is nonsense.The above comment on his New York Times blog is therefore entirely valid regarding an issue on which he has carried out a long polemic with, and been vindicated, against Niall Ferguson and others.
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