Stuck In Stowe

James Galbraith chose option B.

http://voices.washingtonpost.com/ezra-klein/2010/05/galbraith_the_danger_posed_by.html#comments

Interviewed by Ezra Klein, James Galbraith demonstrates either a depth of satirical wit that has never been seen before or a level of incompetence and ignorance that has been seen many many times.  I’m going with Occum’s Razor and also going to choose option B, but decide for yourself.  We will start with the response to the second question

What is the nature of the danger? The only possible answer is that this larger deficit would cause a rise in the interest rate. Well, if the markets thought that was a serious risk, the rate on 20-year treasury bonds wouldn’t be 4 percent and change now. If the markets thought that the interest rate would be forced up by funding difficulties 10 year from now, it would show up in the 20-year rate. That rate has actually been coming down in the wake of the European crisis

I’m going to start you off with a concept so advanced that teaches often have trouble explaining this to 4th graders without the aid of candy bars, opportunity cost.  Ok, you already know what opportunity cost is so just apply it to markets.  Buying a Treasury bond in not a statement that you think interest rates won’t rise beyond the current rate in the future, its a statement that Treasury bonds are a better choice than you other options with the marginal dollars you spent on them.  A person could believe that interest rates were going to rise and still thing a government security was the best investment so the only inference you can make from government interest rates is the relative performance of government bonds in the near future and not the absolute future price of government bonds.

Secondly this concept only applies under a free market.  Market expectations can be distorted by government manipulation.  A short while ago there were many large banks on the brink of insolvency who were given a reprive by the suspension of mark to market accounting.  These banks were essentially given an indefinate period to repair their balance sheets.  Morover there were many central banks in the world lending money at roughly zero percent interest.  Lastly we have the fact that capital requirements for banks usually are based upon the ratings of the securities they hold, and since getting back to adequete resevers is the banks goal holding securities with the lowest requirements makes (coincidentally are government bonds) a modicum of sense.  In addition to this several central banks have participated in quantitative easing whereby they printed up new bills and used them to buy government bonds.  This also distorts the rate.
Thirdly Greece CDS rates, which reflect the probability of default, were at 50 basis points in September 2008.  They reached 250 pts in November.  A 5x increase in three months as shit happens (which it tends to).  The danger of rising interest rates isn’t limited to the most likely outcomes, the danger lies in the actual outcome.  If the markets are pricing in a 5% chance of much higher interest rates in 5 years and 95% chance of similar or lower rates then the current interest rate would not appear to be pricing in much risk of rising rates- but that doesn’t mean the market is pricing it at zero!  Galbraith seems to think so though with his response to the first question.

No, I think the danger is zero. It’s not overstated. It’s completely misstated.

Now within his response to question 3.

At this point, the whole thing is completely incoherent. You cannot write checks to 20 percent to anybody without that money entering the economy and increasing employment and inflation

That is one talented and long lived dog.  I can only imagine the reason Galbraith is unfamiliar with the 1970s in the US is that his dog learned the trick of chewing every page of every book he has ever owned that contained the word stagflation.  You know the term coined to describe the “surprising” phenomenon of rising inflation which was correlated with decreasing employment.  If ignorance is bliss this is one happy mother fucker being interviewed.

From question 4

And if health care does get that expensive, and we’re paying 30 percent of GDP while everyone else is paying 12 percent, we could buy Paris and all the doctors and just move our elderly there.

Yes!  Finally a realistic solution!  We can send all of our patients overseas, and if Canadians pay a lot less for perscription drugs than US residents then US residents can just take Canadian pills!!!

But there can never be a problem for the federal government selling bonds. It goes the other way. The government’s spending creates the bank’s demand for bonds, because they want a higher return on the money that the government is putting into the economy

Unless of course prices rise faster than the increase in money supply.  There is a term for it, is that a Minsky moment?  Oh no, sorry that is in the opposite direction, the term I was looking for is a Mugabe moment.

My father said this process is so simple that the mind recoils from it.

I guess IQ is genetic.

On the other hand, look at Japan. They’ve had enormous deficits ever since the crash in 1988. What’s been the interest rate on government bonds ever since? It’s zero! They’ve had no problem funding themselves. The best asset to own in Japan is cash, because the price level is falling. It gets you 4 percent return.

Ahh yes Japan.  The country that subsidizes its interest rate with cash payments that aren’t included in the rate.

Ahh yes Japan.  The country that entered a 20 year slump with a 15% savings rate (which has dropped to 3%) which is a great comparison to the US with its 3% savings rate.

Ahh yes Japan.  The country that has never had deflation get significantly below 1%, and is currently reporting inflation, somehow is returning 4% on cash.

Ahh yes Japan.  The country that has been in a 20 year slump, faces a recession every time the central banks tries to raise rates, has been cutting services for years but has NOT YET imploded- which means we can infer that it never will.

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