Scott Sumner  

Does Paul Krugman believe that markets are bilingual?

Beckworth and Ponnuru on 2008... Betting Rules...

In my previous post I criticized Paul Krugman's claim that monetary policy could not have been tightening significantly during the summer of 2008, as real bond yields remained low. In other words, Krugman claimed that low bond yields were telling us that monetary policy was not becoming contractionary. Yesterday he said something very different, that low bond yields are telling us that the economy is weakening:

I know, Paul Samuelson famously quipped that the stock market had predicted nine of the last five recessions; the wisdom of crowds is often overrated. Still, bond markets are a bit less flighty than stocks, and also more closely tied to the economic outlook. (A weak economy has mixed effects on stocks -- low profits but also low interest rates -- while it has an unambiguous effect on bonds.) What plunging rates tell us is that markets are expecting very weak economies and possibly deflation for years to come, if not full-blown crisis.
Apparently markets are bilingual! Seriously, why might the economy be weakening? Let's put two plus two together. The Fed starts sending out signals in mid to late 2015 that they need to tighten monetary policy. The economy weakens in Q4 after the Fed signals an intention to tighten. Then the economy weakens further in early 2016 after the Fed actually raises its interest rate on reserves. That's right out of textbook macroeconomics. Tight money slows growth, and this often (although not always) reduces bond yields. Krugman is exactly right in suggesting that the falling bond yields are generally an indication of a weakening economy, not easy money. It's too bad that he forgot that when criticizing Beckworth and Punnuru just a week earlier:
I'd just add that if there were anything to this [tight money in 2008] story, we should have seen a sharp increase in long-term real interest rates, as investors saw the Fed getting behind the disinflationary curve.
Krugman was wrong a week ago, and he's exactly right today.

Over at TheMoneyIllusion today I argued that pundits should not be judged by their ability to get lucky in predicting macroeconomic variables, but rather in the overall coherence of their intellectual framework. Krugman's two posts are an example of a lack of coherence. (In fairness, from a blogger that is generally much more coherent than average.)

HT: Jacob Aaron Geller, Ramesh Ponnuru

Comments and Sharing

COMMENTS (2 to date)
Philip George writes:

The graph of YoY changes in money supply on shows money contracting from the start of 2006.

It continues falling and enters negative territory in September 2006. In June 2007 it starts reversing slowly (a 0.1% increase) and then faster until May 2008 when it starts to fall again.

The relevant dates for comparison on the Fed Funds rate graph are:
July 2006: The Fed stops raising the Funds rate and holds it steady.
July 2007: The Fed starts lowering the Funds rate
May 2008: The Fed stops lowering the Funds rate and holds it steady

Nathan W writes:

I think it is an appropriate time for the quote that "a foolish consistency is the hobgoblin of little minds".

But I don't think you're demanding foolish consistency. Maybe there's a reason that he's changed his mind? Or is he just thinking different things in different days.

After all, if you scour enough writings over enough years by any particularly prolific writer, you're bound to find some contradictions somewhere along the line. I would be rather more concerned about the opposite case, which would suggest excessively rigid thinking.

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