Niall Ferguson on the Wonders of the Invisible World - Grasping Reality with Both Hands
Dashboard
Blog Stats
10/24/10 1:49 PM
Edit Post
Grasping Reality with Both Hands The Semi-Daily Journal of Economist J. Bradford DeLong: Fair, Balanced, RealityBased, and Even-Handed Department of Economics, U.C. Berkeley #3880, Berkeley, CA 94720-3880; 925 708 0467; delong@econ.berkeley.edu.
Economics 210a Weblog Archives DeLong Hot on Google DeLong Hot on Google Blogsearch July 19, 2010
Niall Ferguson on the Wonders of the Invisible World Niall Ferguson: Today’s Keynesians have learnt nothing: The anti-Keynesians point out that bond market sell-offs are seldom gradual. All it takes is one piece of bad news – a credit rating downgrade, for example – to trigger a sell-off. And it is not just inflation that bond investors fear. Foreign holders of US debt – and they account for 47 per cent of the federal debt in public hands – worry about some kind of future default... But they don't. If foreigners holding the U.S. debt feared some kind of future default, some of them would buy CDS insurance and so push the price of CDS insurance for the United States up--as they have in the cases of Greece, Spain, and Ireland, where foreign holders of those sovereigns' debts do fear some kind of future default. They haven't. And while we can never say that one piece of bad news would not trigger a genuine crash in U.S Treasuries, we can say that nobody trading in the markets fears that one piece of bad news will trigger a genuine crash. If anybody did, they would have bought insurance against a big move in U.S. Treasury interest rates--and that would show up as a rise in the price of the Merrill-Lynch MOVE index plotted above right. They haven't. http://delong.typepad.com/sdj/2010/07/niall-ferguson-on-the-wonders-of-the-invisible-world.html
Page 1 of 7
Niall Ferguson on the Wonders of the Invisible World - Grasping Reality with Both Hands
10/24/10 1:49 PM
So not only are there no bond market vigilantes, but nobody trading in the markets today fears the emergence of bond market vigilantes. Ferguson: The Keynesians say the bond vigilantes are mythical creatures... Well, he has got that right at least. Ferguson's problem is that he wants to argue that further fiscal stimulus today would raise unemployment. And in order for that to happen, it's not enough that bigger deficits today might cause some kind of trouble in the future: Ferguson has to say that bigger deficits today are causing people today to fear trouble in the future, and that fear is causing them to pull in their horns. That horn-pulling cannot be accomplished without leaving tracks of some kind in asset markets. And those tracks simply aren't there. But does that stop him from claiming that the invisible and insensible bond market vigilantes are really there? No! These now Testify'd, that he had been at Witch-meetings with them; and that he was the Person who had Seduc'd and Compell'd them into the snares of Witchcraft: That he promised them Fine Cloaths, for doing it; that he brought Poppets to them, and thorns to stick into those Poppets, for the afflicting of other People; And that he exhorted them, with the rest of the Crue, to bewitch all SalemVillage, but be sure to do it Gradually, if they would prevail in what they did... Brad DeLong on July 19, 2010 at 01:06 PM in Economics, Economics: Finance, Economics: Fiscal Policy, Economics: Macro, Obama Administration | Permalink Favorite
Reblog (0) | del.icio.us | Tweet This!
| Digg This | Save to
TrackBack TrackBack URL for this entry: http://www.typepad.com/services/trackback/6a00e551f0800388340133f2663b38970b Listed below are links to weblogs that reference Niall Ferguson on the Wonders of the Invisible World:
Comments John Howard Brown said... Actually the bond market vigilantes are quite real. However, they are off in pursuit of PIIGS right now, not the United States. Where Ferguson is concerned remember that he is a proven fantasist, as witness, his call a few years ago for the United States to assume its mission as an imperial power. How does that square with balancing the budget, given the substantial role of our current wars in inflating the deficit? Reply July 19, 2010 at 01:17 PM http://delong.typepad.com/sdj/2010/07/niall-ferguson-on-the-wonders-of-the-invisible-world.html
Page 2 of 7
Niall Ferguson on the Wonders of the Invisible World - Grasping Reality with Both Hands
10/24/10 1:49 PM
Joe Smith said... Yields on long US government bonds should be up over 6% on any rational basis. They are not because the would be bond vigilantes have no place to go if they abandon the US government securities. If they give up on US bonds the only investments really left to them as alternatives are canned goods and ammunition. Reply July 19, 2010 at 01:18 PM Brad DeLong said... Sewing needles... old Tina Turner videos... bicycle pedals, magnets, and copper wire to generate electricity to play the old Tina Turner videos... Reply July 19, 2010 at 01:20 PM Pangloss said... And to think this celebrity historian actually is an advisor to Cameron, Sometimes a shovel is a shovel and an a-hole is and a-hole. http://bit.ly/bxo0qE Reply July 19, 2010 at 01:23 PM hartal said... You may want to comment on Raghu Rajan's latest unclassifiable reflections on the global economy at his website Faultlines. It seemed to me that he was taking what he takes to be insurmountable political opposition to further stimulus as an excuse to not to make sound criticisms of what you and Krugman are proposing. But don't give up, please. The forces arrayed against you are powerful and numerous, but I sense that you may just win not just the intellectual argument but actual policy victories. And millions of lives may yet be rescued from devastation. Reply July 19, 2010 at 01:23 PM Rob said... If Ferguson's argument held any water, where basically a rounding error on the long term debt causes a bond market crash, then Republicans talking openly about extending all the Bush tax cuts should be causing a market crash right now. Reply July 19, 2010 at 01:41 PM nikubhai said... Why not ask the bond vigilantes themselves as to what they are vigilant about? In his own words, here is the biggest of them, Paul McCulley of PIMCO (http://www.pimco.com/LeftNav/Featured+Market+Commentary/FF/2010/GCB+Focus+July+2010+Facts+on+the+Ground.htm) "Today, the putative bond market vigilantes are not wrapped around the axle about fiscal deficits in fiat currency countries, or for that matter the northern countries that are members of European monetary union (who de facto control the European Central Bank [ECB]). Indeed, their sovereign bonds are in great demand at low yields, just as should logically be expected when the developed world private sector is running ever larger financial surpluses. Fiscal deficits are not crowding out private sector borrowing because the private sector doesn’t want to borrow. Rather, fiscal deficits are facilitating the private sector’s desire to save more, delevering their balance sheets. Remember, the government sector’s liability is the private sector’s asset! What the developed world faces is a cyclical deficiency of aggregate demand, the product of a liquidity trap and the paradox of thrift, in the context of headwinds borne of ongoing structural realignments. Front-loaded fiscal austerity would only add to that deflationary cocktail. And that’s what the market vigilantes are wrapped around the axle about: They are not fleeing the sovereign debt of fiat currency countries but rather http://delong.typepad.com/sdj/2010/07/niall-ferguson-on-the-wonders-of-the-invisible-world.html
Page 3 of 7
Niall Ferguson on the Wonders of the Invisible World - Grasping Reality with Both Hands
10/24/10 1:49 PM
fleeing risk assets, which depend on growth for valuation support." And, therefore, times have changed, as Mr. McCulley continues, " To be sure, the vigilantes have fled Greece, but Greece does not have a fiat currency; Greece is a risk asset and all risk assets depend upon growth for valuation support. And fiscal austerity is not the path to growth if everybody wants to do it at the same time. The risk asset vigilantes, who rightfully fear fiscal austerity–induced deflation, are in charge, not the bond market vigilantes of our youth, who feared fiscal profligacy–induced inflation." The problem with relying on history to make an argument, it appears, is that sometimes history is a tad outdated. Reply July 19, 2010 at 01:52 PM bill northlich said... good! funny! Reply July 19, 2010 at 02:01 PM Anon said... Didn't we just go through a contraction of the Treasury curve? Isn't that an indication of lower overall growth (now and in the future). Bond investors say the Bond market is hot again because economic yields are low. Reply July 19, 2010 at 02:11 PM vedran said... what source of data do ferguson and delong use? historical tables have different figures! Reply July 19, 2010 at 03:01 PM Jerome Turner said... If Niall knew what the hell he was talking about, he wouldn't be on FBN or CNBC so often... Reply July 19, 2010 at 04:19 PM Nathan Myers said... Why would bond traders trust such insurance any more than they trust the bonds? Surely if the U.S. were to default, delivering on promises to those insured against it would be well below short-term survival on anybody's priority list. Reply July 19, 2010 at 04:43 PM K said... They trust such insurance because the mark to market is fully and continuously collateralized. Reply July 19, 2010 at 08:16 PM Nathan Myers said... It's one thing to collateralize, and another thing to fork over when the time comes. What, in an environment in which the U.S. has defaulted, could enforce payment of something that actually retains value, other than a desire to maintain a reputation? What would a reputation be worth? What would be the currency actually handed over? Euros? Title deeds? Yachts? Cases of Jim Beam? I mean these questions seriously. I don't understand what one can reasonably expect from financial instruments after the financial system has collapsed. Reply July 19, 2010 at 10:55 PM Comments on this post are closed. http://delong.typepad.com/sdj/2010/07/niall-ferguson-on-the-wonders-of-the-invisible-world.html
Page 4 of 7
Niall Ferguson on the Wonders of the Invisible World - Grasping Reality with Both Hands
10/24/10 1:49 PM
Would the Court Dare Undo the Mandate?
economics DeLong
Me:
The Atlantic - Oct 20, 2010 She may or may not have been the first major economics blogger, depending on whether we are allowed to throw outlying variables such as Brad Delong out of ... Related Articles » « Previous Next »
Economists: Juicebox Paul Mafia: Krugman Ezra Klein Mark Thoma Matthew Cowen and Yglesias Tabarrok Spencer Chinn and Ackerman Hamilton Dana Brad Setser Goldstein Dan Froomkin
Moral Philosophers: Hilzoy and Friends Crooked Timber of Humanity Mark Kleiman and Friends Eric Rauchway and Friends John Holbo and Friends
http://delong.typepad.com/sdj/2010/07/niall-ferguson-on-the-wonders-of-the-invisible-world.html
Page 5 of 7
Niall Ferguson on the Wonders of the Invisible World - Grasping Reality with Both Hands
http://delong.typepad.com/sdj/2010/07/niall-ferguson-on-the-wonders-of-the-invisible-world.html
10/24/10 1:49 PM
Page 6 of 7
Niall Ferguson on the Wonders of the Invisible World - Grasping Reality with Both Hands
http://delong.typepad.com/sdj/2010/07/niall-ferguson-on-the-wonders-of-the-invisible-world.html
10/24/10 1:49 PM
Page 7 of 7