This is a fucking awesome argument

Kinsley writes that all the ways of looking at the national debt \”lead to varying degrees of panic.\” But obviously there is no panic where it matters, among those who lend money to Uncle Sam. Otherwise 30-year Treasury bonds wouldn\’t be at 3.7 percent, would they?

That\’s from Jamie Galbraith.

An economist who loudly and often argues that markets are not efficient at price discovery. Who rails against bubbles and booms like the dotcom and housing finance ones.

But here he is assuming that the efficient markets hypothesis holds to show that bonds are currently correctly priced.

Isn\’t that lovely?

6 thoughts on “This is a fucking awesome argument”

  1. So Much For Subtlety

    But here he is assuming that the efficient markets hypothesis holds to show that bonds are currently correctly priced.

    At the risk of hate flames from many people here, I would have thought the one thing that Keynes got right is the idea that savings is not always efficient in the usual sense. People can and do save too much or too little. In fact I would think a lot of bubbles were being driven by people who saved too much.

    Often they have to. Look at Japan. The fact that there is no welfare state means people have to save. Even though interest rates are all but negative and have been for a decade and more. An efficient market would tell them not to as the returns are too low. But there is no pension worth mentioning and so no choice.

    A lot of those East Asians are flooding the US with their savings because they are artificially keeping their currency low. It may not be economically sensible either, but it works.

    All those Treasury bonds show is that everyone else has f**ked up even worse than the US.

  2. Japanese savings are pretty much held in the form of their own government’s debt. Japan’s debt/GDP ratio is the highest in the world, but it’s mostly held by their own citizens so markets aren’t worried about it at the moment. So exactly how Japan provide a welfare state without a) vastly increasing their already exorbitant debt b) clobbering the main market for said debt? And wtf have US Treasuries got to do with this?

    A lot of those East Asians are flooding the US with their savings because they too have no welfare state, they need somewhere safe to put their money and they don’t trust their own governments. That correctly pushes up the price of USTs. Efficient markets doing their job, and rational human beings saving for their old age.

    However, we do have mispricing at the moment because of QE, which pushes up UST prices and may suppress the USD to some extent. And Asian central banks may be artificially suppressing their currencies too, though they swear they aren’t (because it breaks IMF rules). If you want to find where market inefficiencies and distortions come from, start by looking at central bank behaviour.

  3. It’s instructive that Japan’s fully-funded private pension system is identical in effect to an unfunded state system, because the government has in any case spent all the money.

  4. So Much For Subtlety

    Frances Coppola – “So exactly how Japan provide a welfare state without a) vastly increasing their already exorbitant debt b) clobbering the main market for said debt? And wtf have US Treasuries got to do with this?”

    You know, I am not sure you have understood enough of what I said to make it worth my while replying to this. This surprises and disappoints me. It is unexpected.

    No one has even remotely suggested that Japan should have a larger welfare state. So any question about how they would fund it is irrelevant. I simply pointed out that:

    1. a lot of East Asian countries, Japan included, do not have a large welfare state and so people have to look after themselves. That means,

    2. they have to save a great deal for things like retirement, the education of their children and even unexpected health care costs in some Asian countries. And,

    3. this is largely unconnected with market price signals. Even if interest rates are negative, even if inflation is high, they still have to save.

    Do you object to any of these claims? As for it having something to do with US Treasuries, a lot of those savings go to the US and end up buying Treasury bonds. As in fact you say in your very next sentence:

    “A lot of those East Asians are flooding the US with their savings because they too have no welfare state, they need somewhere safe to put their money and they don-t trust their own governments. That correctly pushes up the price of USTs. Efficient markets doing their job, and rational human beings saving for their old age.”

    Sure. Up to a point. As, actually, I said. But when interest rates are zero, or even lower, the market is asking people not to save. The market is telling people to go out and buy something. But some people cannot. Because, as you say, they have to save for their old age. If enough of them do this and you get the interesting situation of more money sloshing around than productive investment can absorb, it will have all sorts of bad impacts on the economy.

    “And Asian central banks may be artificially suppressing their currencies too, though they swear they aren-t (because it breaks IMF rules).”

    They may be. As I said. And naturally this is not good for the world economy because the market is telling everyone that the East Asian currencies should be higher. They are fighting that. Mainly by buying US bonds. Which is bad for the Asian consumer. And not working out so well for the US either.

    3PaulB – “It-s instructive that Japan-s fully-funded private pension system is identical in effect to an unfunded state system, because the government has in any case spent all the money.”

    I am not sure why you think it is instructive. It proves that a strong private sector is no guarantee against government theft. But I doubt that is your point.

    Although using words like “private” for Japan-s pension system is problematic anyway. It is a corporatist state so even private institutions are not properly private.

  5. SMFS

    I suppose I should be used to you being rude to me by now. It is pretty tiresome though, especially as you have completely missed the point.

    As the Japanese are mainly saving in their own government’s debt then the price of USTs by definition is not inflated by their savings. This is UNLIKE most other Asian countries and emerging markets, where people save in USTs because their own government’s debt is neither safe nor liquid. I would have thought that was obvious from what I said, but unfortunately you applied what I said about other countries to Japan as well, thereby completely confusing the argument.

    “The fact that there is no welfare state means people have to save” – even when it is not efficient for them to do so because returns are very low. That could be interpreted as a suggestion that a welfare state would be a more efficient means of providing for the elderly. A large captive audience that is pretty much forced to buy its own government’s debt is after all a major market distortion in its own right.

    Please be a little more careful about what you say and how you say it if you don’t wish to be misunderstood.

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