When Other Countries Have the Money...
Jonathan Cohn on the Congressional Budget Office and Health Care Reform

Worrying About the Long Run Fiscal Picture: DeLong Smackdown Watch (Conference Call Version)

A snippet from a conversation:

Brad DeLong: For some time I have been lulling myself to sleep every night by saying: "The U.S. Thirty-Year Treasury interest rate is still low; until the bond market is worried about the unsustainability of U.S. fiscal policy and that shows itself in Treasury bond prices I shouldn't worry either." Can I still do so?

Sokrates: I very much doubt, given your general view of the accuracy, rationality, and foresight of asset markets, that you have ever in fact lulled yourself to sleep in that way...

This is a severe problem with my attempt to visualize the Cosmic All. On the one hand, I believe that the financial market is often feeding very wrong prices to the real economy--that the no-free-lunch fact that it is very hard to make lots of money quickly without assuming much risk off a relatively small capital base does not imply the price-is-right version of the efficient market hypothesis.

On the other hand, I do find myself over and over again reaching for asset prices as sources of information about the likely future, or at least the generally expected future, or at least about what average opinion expects average opinion to expect the conventiona wisdom about the likely future to be.

This is a problem...