Paul Krugman: Liquidity Preference and Loanable Funds
Paul Krugman:
Liquidity Preference and Loanable Funds, Still: More than two years have passed since the big debate over the effect of budget deficits on interest rates in a liquidity trap. The original argument of the anti-stimulus types was that large-scale government borrowing would drive up interest rates even in the face of high unemployment, and that this would hurt the economy. At that time the argument was framed in terms of simple crowding out, not solvency. And I argued that the whole thing represented a failure to understand basic macroeconomics.... The apologists offer a series of special explanations; it was the Greek debt crisis driving investors into the dollar safe haven; it’s the Fed’s purchases; whatever. We’ll what happens when the latter end at the end of this month, by the way. But this was as close to a clean test of a proposition as history ever offers. And liquidity preference won, hands down.
Indeed. I remember August 11, 2009. I could barely believe it then. And we have had two more years:
Brad DeLong: August 11, 2009: The U.S. Can Sell Bonds. Boy! Can the U.S. Sell Bonds!: Peter Boockvar [writes]:
3 year note auction | The Big Picture: The 3 year note auction, the easiest of the big three this week because of its short maturity, was very good. The yield was about in line with expectations but the bid to cover of 2.89 is well above the average this year of 2.52 and the highest since Nov ‘08. Indirect bidders totaled 62.5% which is above the prior two which reflected the new methodology of calculation. With many, particularly the Chinese, shifting to the shorter end of the curve from the longer end, today was an easy sale. The tough part though comes tomorrow when the 10 yr benchmark note auction takes place with the 30 yr following on Thursday. I must say that our country’s finances are in such a state of affairs that the biggest economy in the world has to now cross its fingers right before the published results of debt auctions....
[S]upply-and-demand are supposed to rule--and a sharp increase in Treasury borrowings is supposed to carry a sharp increase in interest rates along with it to crowd out other forms of interest sensitive spending. Hasn't happened. Hasn't happened at all.... It is astonishing. Between last summer and the end of this year [2009] the U.S. Treasury will expand its marketable debt liabilities by $2.5 trillion--an amount equal to more than 20% of all equities in America, an amount equal to 8% of all traded dollar-denominated securities. And yet the market has swallowed it all without a burp...
