Semi-Daily Journal

Two things. First, even as someone who has long enjoyed Krugman's columns (A thinking, economically literate liberal! In print on a regular basis! Too good to be true!) it strikes me that his recent columns have strayed too often into shrillness. The column about locking in his home interest rate is a good example. Far too many amplifier adjectives, even for the op-ed page, and the frightened tone (I'm losing the house!! And you will too!!) invites disbelief.

Second, a question. Is it really true that the deflation and inflation problems are distinct short- and long-term problems that can't bear on one another? Hasn't the Japanese deflation lasted a good long time - and didn't the Great Depression leave America either deflationary or on the very of deflation for over a decade? Or, to consider our situation, could we get mild deflation and continued government deficits not sufficient to shock us into growth? It's been a *long* time since I've had macro, so any thoughts would be welcome.

Also, it's hardly clear that Krugman is thinking like Brad is, that deflation is short term (if ever) and inflation is long term. If inflation isn't a threat for 10 years or more, and the most likely prospect for the next few years is stable or falling rates, why not wait? I certainly know people who locked in rates on their school loans two-three years ago, thinking they'd got the best deal maginable, who now rue the day. That memory should be fresh.

Two things. First, even as someone who has long enjoyed Krugman's columns (A thinking, economically literate liberal! In print on a regular basis! Too good to be true!) it strikes me that his recent columns have strayed too often into shrillness. The column about locking in his home interest rate is a good example. Far too many amplifier adjectives, even for the op-ed page, and the frightened tone (I'm losing the house!! And you will too!!) invites disbelief.

Second, a question. Is it really true that the deflation and inflation problems are distinct short- and long-term problems that can't bear on one another? Hasn't the Japanese deflation lasted a good long time - and didn't the Great Depression leave America either deflationary or on the very of deflation for over a decade? Or, to consider our situation, could we get mild deflation and continued government deficits not sufficient to shock us into growth? It's been a *long* time since I've had macro, so any thoughts would be welcome.

Also, it's hardly clear that Krugman is thinking like Brad is, that deflation is short term (if ever) and inflation is long term. If inflation isn't a threat for 10 years or more, and the most likely prospect for the next few years is stable or falling rates, why not wait? I certainly know people who locked in rates on their school loans two-three years ago, thinking they'd got the best deal maginable, who now rue the day. That memory should be fresh.

Ted: we're just all hoping Japanese-style deflation is not going to grip the US for a decade... And remember social security problems are going to hit a decade down the road, so even if deflation is protracted there are (hopefully) few chances in will overlap with the pension crisis.

(Now if you have a home morgage, it may still make a major difference if you can lock in today's interest rate to avoid tomorrow's higher interest rates that will come as a result of the government swallowing all savings to pay for pensions.)

Let's make matters even more confusing: How are business bankruptcies doing in the US? I know that personal bankruptcies are to hit a record high in 2003. My fear is that with deflation taking hold on the (manufacturing) output markets, inflation in some input prices (say, oil) may run the risk to hurt profitability further and trigger a wave of bankruptcies. My idea is that with weak demand, firms cannot easily pass-through input price increases without further hurting demand.

Deflation in the U.S. during the Great Depression lasted three years: 1930-1932. In particular, calendar year inflation was negative in those years, according to data from Ibbotson Associates. Inflation turned positive again in 1933, though just barely, and remained so till it moved back to negative territory in 1938-1939.

As for Japan's deflation, along with much else that ails the country's financial situation, the pain is largely self-inflicted.

Deflation and inflation aren't really separate and distinct phenomena. Rather, they're a continuation of the other. Deflation is the flip side of inflation akin to bull and bear markets. One necessarily precedes the other. The two are inextricably connected. It's all about trend. Currently, we are in state of dis-inflation, i.e., falling rates of inflation, which may, may, turn into deflation, just as the high inflation of the early 1980s has turned into the low inflation of the moment. The idea that deflation and inflation are two realms unrelated should be put to rest.

As for whether Krugman's become shrill, I'll leave that to the masses to decide.

As someone who is aghast at the lack of responsibility shown by most of our "mainstream" lapdog corporate media, I'm glad that Krugman is following the money, which is inextricably linked to power.

Hmmmm. I've seen a lot of conservabots of the GOPTeamLeader.com using the "S" word (shrill) against Krugman lately. These same folks usually don't even attempt to debate him on the facts; they just try to smear him with cute modifiers.

This reminds me of how Candidate Bush attacked Gore for using "fuzzy math", but didn't even attempt to explain how Gore's numbers would have been fuzzy. Considering that Bush pulled his numbers out of Karl Rove's butt, this is yet another example of Bush's hypocrisy.

But the mainstream press -- especially the broadcast press, where most Americans get their news -- didn't pay much attention to Bush's blatant lies; instead, they nitpicked Gore to death, inventing "lies" where none existed.

Hmmmm. I've seen a lot of conservabots of the GOPTeamLeader.com using the "S" word (shrill) against Krugman lately. These same folks usually don't even attempt to debate him on the facts; they just try to smear him with cute modifiers.

This reminds me of how Candidate Bush attacked Gore for using "fuzzy math", but didn't even attempt to explain how Gore's numbers would have been fuzzy. Considering that Bush pulled his own numbers out of Karl Rove's butt, this is yet another example of Bush's hypocrisy.

But the mainstream press -- especially the broadcast press, where most Americans get their news -- didn't pay much attention to Bush's blatant lies; instead, they nitpicked Gore to death, inventing "lies" where none existed.

"One -- possible deflation -- is a problem for the next three years. The second -- possible inflation -- is a problem that may begin to threaten the country starting at the soonest a decade hence"

Well, then that can hardly be the reason to go and lock in a fixed rate long-term mortgage *now* as Krugman said....

"last week I switched to a fixed-rate mortgage. It means higher monthly payments [but]... what's really scary -- what makes a fixed-rate mortgage seem like such a good idea —- is the looming threat to the federal government's solvency."

OK, it probably is a real good time to refinance and lock in long term mortgage rates (as a whole lot of people are doing). But if so, it's because rates are at a 30-year low due to economic cycle conditions. Considering the huge opposite-direction swings that the deficit and mortgage rates have taken, the effect of deficit projections on rates is trivial over the short-to-intermediate run compared to the effect of other economic conditions, quite obviously.

I mean, if we really have the threat of deflation over the next five years, as you say, while the threat of rising rates due to inflation is a "long-run government budget balance" threat, as you say, then the latter can hardly be the motive to lock in long-term rates *last week*.

So by saying deficit projections and "looming government insolvency" (decades from now) are the reason to refinance mortgages today (last week!) Krugman was being what, sloppy? disingenuous? engaging in a little rhetorical scare tactic by trying to conflate near-term home costs and deficit projections in readers' minds?

BTW, if deflation is a real threat in the near future, then people would do better to wait to lock in long rates. So I guess Prof. K. has voted with his own money on that issue.

Great news! Unless P Krugman is worried about a repeal of the Twenty-Second Amendment, we will have regime change here in the US no later than January 2009, a mere six years from now.

Hmmmm. I've seen a lot of conservabots of the GOPTeamLeader.com using the "S" word (shrill) against Krugman lately. These same folks usually don't even attempt to debate him on the facts; they just try to smear him with cute modifiers.

This reminds me of how Candidate Bush attacked Gore for using "fuzzy math", but didn't even attempt to explain how Gore's numbers would have been fuzzy. Considering that Bush pulled his numbers out of Karl Rove's butt, this is yet another example of Bush's hypocrisy.

But the mainstream press -- especially the broadcast press, where most Americans get their news -- didn't pay much attention to Bush's blatant lies; instead, they nitpicked Gore to death, inventing "lies" where none existed.

Ted, I've had the same feeling about Krugman lately. I've been reading his stuff since he wrote "Peddling Prosperity" in the early '90s. I've been kind of put off by his shrillness, until I realized it mirrors my own gut feelings. My gut tells me we are on the verge of very bad times.
But enough with "feelings", I had the same question when I read the column yesterday, but felt the answer was something along the lines of Brad's answer.
I think the key to PK's argument yesterday was how do irresponsible governments cope with too much debt. They start printing money like mad. Its happened in the US in the past, but I don't know that its happened since the Federal Reserve came into being.
The US Govt can always meet its debt obligations becuase it, (unlike you and me) can print money. The downside to this is inflation (or worse hyperinflation) requiring the printing of more leading to more inflation requiring the printing of more money leading to ..... aaargghhh....

Um.. It's precisely a reason to get a long term mortage *now.* Long term rate will start climbing *in anticipation.* forward looking and whatnot.

He could be wrong in his prediction - it is a 'what if' scenario based on an educated guess, but his reasoning is correct.

Try again.

It amazes me that people are so enraptured with Paul Krugman's NYT column. I almost always agree with what he has to say, but it always seems so shrill and partisan. I too have read a lot of his popular economics stuff, so maybe that has something to do with it. But I definitely think a 2000 word column would give him a chance to say something with a little authority.

But in his article Krugman dramatically concludes that he is taking out a fixed rate mortgage NOW. If Krugman really fears deflation first, followed by inflation ten years hence, then why this exercise in personal finance right now?

p.s. Should I buy gold also?

But in his article Krugman dramatically concludes that he is taking out a fixed rate mortgage NOW. If Krugman really fears deflation first, followed by inflation ten years hence, then why this exercise in personal finance right now?

p.s. Should I buy gold also?

one thing that is not being taken into account in this discussion is the fact that many people don't take out 30 year loans anymore. why would you want to if you know you will be trading up to another house (as has beenn the american way over the last 20 years or so)in four or five years; or moving to another state to take voluntary or involuntary "advantage" of a more flexible labour market. in that case, some of us take out adjustable rate loans.

i would like to get a sense of how you think this might affect the analysis, apart from the obvious one that rising rates five years from now will cut the expected price i could get when i attempt to sell my house...

Folks here are forecasting specific, quantifiable scenarios -- deflation then inflation -- within specific time horizons spanning a decade or more.

Any cursory review of historic forecast accuracy over relatively modest horizons of quarters or a couple of years has to humble anyone who is candid about this.

"It's precisely a reason to get a long term mortage *now.* Long term rate will start climbing *in anticipation.* "

Yet the markets have all the information Krugman has to *anticipate*, so if the long future deficit position drives current mortgage rates up in "anticipation", why aren't they going up now?

As an answer, since Krugman cites Mankiw, we can too: deficts do raise rates, other things being equal -- but other things aren't equal and among them future deficits don't affect current rates by much at all. As per the last year's experience. So, again, they can't honestly be the reason to refinance *last week*.

But here's a serious question about the market's *anticipation* of the future fiscal situation and its effect on current long rates:

We admit it is this anticpation of continued future deficts that is the primary mover of rates, since even the academic supporters of the defict/rate connection say it barely exists, if at all, in the short run.

Now the latest round of Bush tax cuts is about $1 trillion, discounted to current value. And it is politically speculative, who knows what if anything will be finally enacted?

At the same time, the unfunded liability for Social Security and Medicare (future expected payments in excess of future expected revenue to pay for them) is accumulating at about $2 trillion *each year* in current value. That's one heck of a lot more!

They are both anticiapted and both contribute to the future "national insolvency" -- only the SS & Medicare deficits are already enacted into law, while the Bush tax cuts remain speculative; and the SS & Medicare deficits are a heck of a lot larger and accumulating a heck of a lot faster.

So why is it *only* the Bush tax cuts that are supposed to affect current interest rates?

How come the markets only anticipate the affect of them? Why don't the markets anticipate the much surer and larger effect of SS and Medicare and show it in current long rates?

Why isn't Krugman urging people to refinance their homes and lock in low rates today because of the interest rate effect of SS & Medicare?

"But he's shrill!"

Well, Ann Coulter and her ilk are both shrill and liars.

As for Krugman: well, someone has to do the job of Juvenal in times like these:

http://www.fordham.edu/halsall/ancient/juv-sat1lateng.html

"Difficile est saturam non scribere."

"But he's shrill!"

Well, Ann Coulter and her ilk are both shrill and liars.

As for Krugman: well, someone has to do the job of Juvenal in times like these:

http://www.fordham.edu/halsall/ancient/juv-sat1lateng.html

"Difficile est saturam non scribere."

Maybe no on wants to mention the looming effect of SS on interest rates because they're not willing to talk about what it would take to fix the problem.

Lower SS benefits for boomers = political suicide

So what else can be done, as that's primarily a demographic problem?

Well, allowing more open immigration to grow the tax base faster than the current US fertility rate has some Homeland Security problems right now, and I don't see any other fixes for it.

Bright ideas welcomed...

Is thre room for a quibble about whether the short-term deflationary threat and the long-term inflationary threat have anything to do with each other? On the assumption that near-term deflation would widen the budget gap, wouldn't it increase the temptation to monetize the debt on down the road? Deflation making inflation more likely, then.

Mortgages are financed by long term
bonds. What is the value of a long term
(10-20 years) bond at 5% if inflation goes
to 10%? That is why Krugman refinanced

>...someone has to do the job of Juvenal

Juvenal: Be rich to yourself and poor to your friends.

>...someone has to do the job of Juvenal

Juvenal: Be rich to yourself and poor to your friends.

Suggest a look at Hal Varian [Berkeley]
Suggest a look at Alan Krueger [Princeton]

They are as worried as I am, as Paul Krugman and Brad DeLong are, about the awful buget problems this Administration is bent on causing. I dearly dearly love reading Paul Krugman. There is no finer economics columnist!

http://www.nytimes.com/2003/02/13/business/13SCEN.html

http://www.nytimes.com/2003/03/06/business/06SCEN.html

Mickey Mouse is mere a know-nothing propagandist.

Your argument about time scales is pretty unconvincing.

Japan is a case in point. While deflation strictly speaking may have been a problem only in recent years, the vicious cycle that set up deflation has been around for perhaps a decade. So far as I know, that vicious cycle continues unabated, and will so for the foreseeable future.

Are you really asserting that the problem with deflation in Japan is just going to solve itself in a short while, since it's a "business cycle" problem? If indeed as you sugggest it is perhaps a precursor to depression, well, it seems to me that depressions can last a long long time.

And it is OBVIOUSLY true that Japan already has an immense national debt, getting worse, and we're not exactly seeing signs of inflation, are we?

If you can't point out how Japan and the US are in completely different situations, I don't see how you argument holds any water.

Three contemporary well-measured events of enormous govt deficits have coincided with declining interest rates: The Reagan years, post-bubble Japan, and W's administration.

While personally I prefer small govt and no deficits, it is very hard to look at the data and argue that deficits pose a harrowing danger.

Are nearly all the world's economists now being "shrill" also? Look for the GOPTeamLeader key word before considering the content of the posting.

As a commentator on PBS happily crowed, "the budget deficits we are running are Reaganesque." Supply-siders are a hoot. Of course they really intend to destroy Social Security and Medicare. Shhhh. No one must know.

Paul Krugman knows and has the courage to let others know. If you prefer Rush Limbaugh, I could care less.

Paul Krugman isn't making that big a bet by converting to a fixed-rate mortgage. If he's wrong and right (about inflation and deflation, respectively) he'll simply exercise his prepayment option and refinance at a lower rate. When fiscal policy is this unreliable, buying some insurance isn't that bad an idea, especially when the downside is limited.

His bigger gamble is on his Nobel, which he's putting at risk, I think, by trying to cram too much about complex topics in too short a space.

Yeah, but the real question is: why does Krugman have a mortgage in the first place? He makes a ton of money and claims that he lives in a modest house.

So why doesn't he just pay it off?

Paul Krugman isn't making that big a bet by converting to a fixed-rate mortgage. If he's wrong and right (about inflation and deflation, respectively) he'll simply exercise his prepayment option and refinance at a lower rate. When fiscal policy is this unreliable, buying some insurance isn't that bad an idea, especially when the downside is limited.

His bigger gamble is on his Nobel, which he's putting at risk, I think, by trying to cram too much about complex topics in too short a space.

Re "I'm losing the house!! And you will too!!" ... maybe Krugman buried the lede with all that window-dressing. Or maybe he's coming back to reinforce it.

The estimated fiscal swing (from plus $5.6T to minus ~$3.0T, or $8.6T) is a very large fraction of estimated total US private tangible wealth (depending which series you like and how you cost it).

You, Mr. Joe Average American, just lost something worth 40%-80% of every lock, stock and barrel ... and you never saw it coming. (You never saw it going either, but you will.)
That's a lot of houses on Boardwalk and Park Place.

Krugman is "shrill" because the Dear Leader is "bold", and shows "moral clarity". Phew, maybe that will keep me out of Gitmo.

Japan has a huge demand problem brought on by a society that saves money far more than they invest or spend it. The reason why deflation is such a problem is because people don't spend money in Japan. There are really two ways to change that in Japan.
1. Print more money.
2. Discourage saving.
Savings have been discouraged for quite a while - interest on savings is near-zero. But that hasn't budged a single thing. So what Japan really needs to do is print a boatload of more yen. Hopefully, people will actually spend some of that money, instead of saving it like they have, and the spending will drive the economy out of deflation. However, Japan's central bank won't do that, for a number of reasons, all of which are available in a good Krugman article: http://web.mit.edu/krugman/www/nikkei.html

The difference with the problem here is that while deflation may strike for the short term, the long-term trend will be towards inflation because of large public deficits that will simply spiral out of control. We don't have a savings-oriented society, and as such, the deflationary pressure that is caused by not spending won't exist here. People will spend money, buying stuff, that will drive inflation, normal growth should eventually resume, inflation will return to normal levels by the end of the decade, helped by the inflationary pressure of the deficit. As the deficit balloons, so does inflation. This is helped by the increased spending needed for social security and medicare, and boom. Double digit inflation, currency devaluation, credit rating hits, and all sorts of wonderful badness. Deficits aren't bad in and of themselves, but when we have a huge expense looming on the horizon, other spending priorities, like homeland defense, that need to be met, and a climbing national debt, a deficit isn't a good thing to run.

Krugman is "shrill" because the Dear Leader is "bold", and shows "moral clarity". Phew, maybe that will keep me out of Gitmo.

Japan has a huge demand problem brought on by a society that saves money far more than they invest or spend it. The reason why deflation is such a problem is because people don't spend money in Japan. There are really two ways to change that in Japan.
1. Print more money.
2. Discourage saving.
Savings have been discouraged for quite a while - interest on savings is near-zero. But that hasn't budged a single thing. So what Japan really needs to do is print a boatload of more yen. Hopefully, people will actually spend some of that money, instead of saving it like they have, and the spending will drive the economy out of deflation. However, Japan's central bank won't do that, for a number of reasons, all of which are available in a good Krugman article: http://web.mit.edu/krugman/www/nikkei.html

The difference with the problem here is that while deflation may strike for the short term, the long-term trend will be towards inflation because of large public deficits that will simply spiral out of control. We don't have a savings-oriented society, and as such, the deflationary pressure that is caused by not spending won't exist here. People will spend money, buying stuff, that will drive inflation, normal growth should eventually resume, inflation will return to normal levels by the end of the decade, helped by the inflationary pressure of the deficit. As the deficit balloons, so does inflation. This is helped by the increased spending needed for social security and medicare, and boom. Double digit inflation, currency devaluation, credit rating hits, and all sorts of wonderful badness. Deficits aren't bad in and of themselves, but when we have a huge expense looming on the horizon, other spending priorities, like homeland defense, that need to be met, and a climbing national debt, a deficit isn't a good thing to run.

Japan has a huge demand problem brought on by a society that saves money far more than they invest or spend it. The reason why deflation is such a problem is because people don't spend money in Japan. There are really two ways to change that in Japan.
1. Print more money.
2. Discourage saving.
Savings have been discouraged for quite a while - interest on savings is near-zero. But that hasn't budged a single thing. So what Japan really needs to do is print a boatload of more yen. Hopefully, people will actually spend some of that money, instead of saving it like they have, and the spending will drive the economy out of deflation. However, Japan's central bank won't do that, for a number of reasons, all of which are available in a good Krugman article: http://web.mit.edu/krugman/www/nikkei.html

The difference with the problem here is that while deflation may strike for the short term, the long-term trend will be towards inflation because of large public deficits that will simply spiral out of control. We don't have a savings-oriented society, and as such, the deflationary pressure that is caused by not spending won't exist here. People will spend money, buying stuff, that will drive inflation, normal growth should eventually resume, inflation will return to normal levels by the end of the decade, helped by the inflationary pressure of the deficit. As the deficit balloons, so does inflation. This is helped by the increased spending needed for social security and medicare, and boom. Double digit inflation, currency devaluation, credit rating hits, and all sorts of wonderful badness. Deficits aren't bad in and of themselves, but when we have a huge expense looming on the horizon, other spending priorities, like homeland defense, that need to be met, and a climbing national debt, a deficit isn't a good thing to run.

Japan has a huge demand problem brought on by a society that saves money far more than they invest or spend it. The reason why deflation is such a problem is because people don't spend money in Japan. There are really two ways to change that in Japan.
1. Print more money.
2. Discourage saving.
Savings have been discouraged for quite a while - interest on savings is near-zero. But that hasn't budged a single thing. So what Japan really needs to do is print a boatload of more yen. Hopefully, people will actually spend some of that money, instead of saving it like they have, and the spending will drive the economy out of deflation. However, Japan's central bank won't do that, for a number of reasons, all of which are available in a good Krugman article: http://web.mit.edu/krugman/www/nikkei.html

The difference with the problem here is that while deflation may strike for the short term, the long-term trend will be towards inflation because of large public deficits that will simply spiral out of control. We don't have a savings-oriented society, and as such, the deflationary pressure that is caused by not spending won't exist here. People will spend money, buying stuff, that will drive inflation, normal growth should eventually resume, inflation will return to normal levels by the end of the decade, helped by the inflationary pressure of the deficit. As the deficit balloons, so does inflation. This is helped by the increased spending needed for social security and medicare, and boom. Double digit inflation, currency devaluation, credit rating hits, and all sorts of wonderful badness. Deficits aren't bad in and of themselves, but when we have a huge expense looming on the horizon, other spending priorities, like homeland defense, that need to be met, and a climbing national debt, a deficit isn't a good thing to run.

Wow. Even qualified criticism of Paul Krugman makes you a conservabot, a GOPTeamLeader, a fan of Rush Limbaugh and Ann Coulter -- or somebody just trying to stay out of gitmo. This is sad.

If all you want said about you is that you're no worse that Ann Coulter, I think you need to aim a little higher.

What's great about this website (and Krugman at his best) is that it does aim higher. Krugman's hammering at Bush during the campaign (remember the 3 dollar - 4 dollars columns) was so dead on and so very necessary.

My own view is that the GOP and supply-siders are wrong, and I think we might have enough confidence about that to write in a way that does lay out the evidence. That way we might appeal to the undecided and uninitiated -- while adding to the knowledge the already converted. It makes great sense to me that Krugman should write fewer, longer columns.

True, the evidence *is* accumulating that mindless persecution of one's opponents can be rather successful. Maybe it's good that some liberals are trying to make use of the trope. Maybe we can work the refs too.

But if so, let's just get a hack to write the red meat stuff. There's can't be comparative advantage in having Krugman sink to the thoughtless depths of Coulter, Limbaugh, or their ilk. Krugman has real skills that are all too rare.

Japan has a huge demand problem brought on by a society that saves money far more than they invest or spend it. The reason why deflation is such a problem is because people don't spend money in Japan. There are really two ways to change that in Japan.
1. Print more money.
2. Discourage saving.
Savings have been discouraged for quite a while - interest on savings is near-zero. But that hasn't budged a single thing. So what Japan really needs to do is print a boatload of more yen. Hopefully, people will actually spend some of that money, instead of saving it like they have, and the spending will drive the economy out of deflation. However, Japan's central bank won't do that, for a number of reasons, all of which are available in a good Krugman article: http://web.mit.edu/krugman/www/nikkei.html

The difference with the problem here is that while deflation may strike for the short term, the long-term trend will be towards inflation because of large public deficits that will simply spiral out of control. We don't have a savings-oriented society, and as such, the deflationary pressure that is caused by not spending won't exist here. People will spend money, buying stuff, that will drive inflation, normal growth should eventually resume, inflation will return to normal levels by the end of the decade, helped by the inflationary pressure of the deficit. As the deficit balloons, so does inflation. This is helped by the increased spending needed for social security and medicare, and boom. Double digit inflation, currency devaluation, credit rating hits, and all sorts of wonderful badness. Deficits aren't bad in and of themselves, but when we have a huge expense looming on the horizon, other spending priorities, like homeland defense, that need to be met, and a climbing national debt, a deficit isn't a good thing to run.

Japan has a huge demand problem brought on by a society that saves money far more than they invest or spend it. The reason why deflation is such a problem is because people don't spend money in Japan. There are really two ways to change that in Japan.
1. Print more money.
2. Discourage saving.
Savings have been discouraged for quite a while - interest on savings is near-zero. But that hasn't budged a single thing. So what Japan really needs to do is print a boatload of more yen. Hopefully, people will actually spend some of that money, instead of saving it like they have, and the spending will drive the economy out of deflation. However, Japan's central bank won't do that, for a number of reasons, all of which are available in a good Krugman article: http://web.mit.edu/krugman/www/nikkei.html

The difference with the problem here is that while deflation may strike for the short term, the long-term trend will be towards inflation because of large public deficits that will simply spiral out of control. We don't have a savings-oriented society, and as such, the deflationary pressure that is caused by not spending won't exist here. People will spend money, buying stuff, that will drive inflation, normal growth should eventually resume, inflation will return to normal levels by the end of the decade, helped by the inflationary pressure of the deficit. As the deficit balloons, so does inflation. This is helped by the increased spending needed for social security and medicare, and boom. Double digit inflation, currency devaluation, credit rating hits, and all sorts of wonderful badness. Deficits aren't bad in and of themselves, but when we have a huge expense looming on the horizon, other spending priorities, like homeland defense, that need to be met, and a climbing national debt, a deficit isn't a good thing to run.

Japan has a huge demand problem brought on by a society that saves money far more than they invest or spend it. The reason why deflation is such a problem is because people don't spend money in Japan. There are really two ways to change that in Japan.
1. Print more money.
2. Discourage saving.
Savings have been discouraged for quite a while - interest on savings is near-zero. But that hasn't budged a single thing. So what Japan really needs to do is print a boatload of more yen. Hopefully, people will actually spend some of that money, instead of saving it like they have, and the spending will drive the economy out of deflation. However, Japan's central bank won't do that, for a number of reasons, all of which are available in a good Krugman article: http://web.mit.edu/krugman/www/nikkei.html

The difference with the problem here is that while deflation may strike for the short term, the long-term trend will be towards inflation because of large public deficits that will simply spiral out of control. We don't have a savings-oriented society, and as such, the deflationary pressure that is caused by not spending won't exist here. People will spend money, buying stuff, that will drive inflation, normal growth should eventually resume, inflation will return to normal levels by the end of the decade, helped by the inflationary pressure of the deficit. As the deficit balloons, so does inflation. This is helped by the increased spending needed for social security and medicare, and boom. Double digit inflation, currency devaluation, credit rating hits, and all sorts of wonderful badness. Deficits aren't bad in and of themselves, but when we have a huge expense looming on the horizon, other spending priorities, like homeland defense, that need to be met, and a climbing national debt, a deficit isn't a good thing to run.

Re: Krugman's premature rush to refinance. Question: during a period of deflation, what bank is going to refinance a mortgage on property whose market value suddenly is, or may quickly become, less then what the property owner owes on it, even if mortgage rates themselves remain low? Isn't that also a risk? Rates could be great, but can you refinance a house that isn't worth what you owe on it?

Japan has a huge demand problem brought on by a society that saves money far more than they invest or spend it. The reason why deflation is such a problem is because people don't spend money in Japan. There are really two ways to change that in Japan.
1. Print more money.
2. Discourage saving.
Savings have been discouraged for quite a while - interest on savings is near-zero. But that hasn't budged a single thing. So what Japan really needs to do is print a boatload of more yen. Hopefully, people will actually spend some of that money, instead of saving it like they have, and the spending will drive the economy out of deflation. However, Japan's central bank won't do that, for a number of reasons, all of which are available in a good Krugman article: http://web.mit.edu/krugman/www/nikkei.html

The difference with the problem here is that while deflation may strike for the short term, the long-term trend will be towards inflation because of large public deficits that will simply spiral out of control. We don't have a savings-oriented society, and as such, the deflationary pressure that is caused by not spending won't exist here. People will spend money, buying stuff, that will drive inflation, normal growth should eventually resume, inflation will return to normal levels by the end of the decade, helped by the inflationary pressure of the deficit. As the deficit balloons, so does inflation. This is helped by the increased spending needed for social security and medicare, and boom. Double digit inflation, currency devaluation, credit rating hits, and all sorts of wonderful badness. Deficits aren't bad in and of themselves, but when we have a huge expense looming on the horizon, other spending priorities, like homeland defense, that need to be met, and a climbing national debt, a deficit isn't a good thing to run.

Re: Krugman's premature rush to refinance. Question: during a period of deflation, what bank is going to refinance a mortgage on property whose market value suddenly is, or may quickly become, less then what the property owner owes on it, even if mortgage rates themselves remain low? Isn't that also a risk? Rates could be great, but can you refinance a house that isn't worth what you owe on it?

Perhaps. If you owe $80 K on the house, and the market value has sunk to $60K, you might ust walk away from it. But then the bank takes the house, and you still owe them $20 K. (actually, at least $30K because they'd want costs and fees) If they come to collect, you'd have to declare bankruptcy, assuming you have no other major assets.

So you'd like to refinance. And maybe the bank would to. After all, they'd rather you didn't go bankrupt either - you might be able to get them to take $65 K for your $60 K house. They lose the $15K, but it's more likely that you'll pay the $65K off. Especially if you like the house.

Why ever should anyone waste time reading "Mickey Mouse"?

"Re: Krugman's premature rush to refinance. Question: during a period of deflation, what bank is going to refinance a mortgage on property whose market value suddenly is, or may quickly become, less then what the property owner owes on it, even if mortgage rates themselves remain low? Isn't that also a risk?"

The US had plenty of experience with this during the deflationary post Civil War 19th Century, when deflation ran 5%-6% on average and growth was quite strong on average.

There were no problems with mortgage and other kinds of long-term lending generally -- when deflation is expected nominal loan terms are adjusted to give lenders the competitive market real return they need, just as terms are adjusted to do so when inflation is expected.

Buf if we were in a period of deflation with high inflation anticipated because of the pending national insolvency, hmmm, we could have a deflationary period where long rates were so high to protect lenders against the anticipated inflation that nobody could afford to borrow. That would be an oddity.

Let's watch and see if it happens in Japan first, which has moved a lot further down the road towards both deflation and national insolvency than we have.

About Japan, I understand that the strong urge to save in Japan is the cause of massive unfunded liabilities, among them a massive pension deficit on top of 120%+ of GDP in Japanese federal gov't debt. Umm, sound familiar?

I'm no expert on this topic so I'd like to hear qualified commentary.

I think the problem with Krugman's column (and I do sense one) is a problem with columns generally. What readers really seem to want is to see a variety of issues addressed, and the possibility that the columnist in question can make surprising judgements (e.g., "however much I hate his economic policy, Bush's work on
behalf of X is laudable...") Krugman is an economist, and he really is best off when he sticks to those issues he knows best. So, I'm sure he *could* write about the future of higher education or something, but the opinion would probably not be seen as an expert opinion, so it wouldn't be as attractive on those grounds. So given that Krugman will spend most of his time writing about economics directly (or mention the economic consequences of other decisions), he will lack the variety of some of the other op/ed folk at the times. That leaves us with surprising judgements, and I don't see how many of those are going to happen given that the economic policies of the current administration can best be summarized as easing the tax burden of the very wealthy at very high cost to the budget situation while pretending to do something else entirely. Now, I've seen serious people suggest that lowering marginal rates on the top brackets and on investment in general is a good thing even at high cost, but nobody serious who has argued that the administrations selling of this policy as immediate stimulus makes any sense. Krugman, of course, is likely to have a different opinion, at which point the intellectual dishonesty of the Bush economic plan becomes truly infuriating rather than something that just makes your eyes roll a bit. So I think it's fair to say that Krugman's commentary seems to be in a rut, but I'm not sure what else he would be likely to do. *Except* he could spend more column time discussing the economic situation of other nations, issues of international trade, and other things he knows about that have the chief value that they do not always involve the Bush administration.

Now, one of my favorite New Yorker cartoons of all time is a Victoria Roberts one where the woman says "If you weren't so funny all the time, I'd probably laugh more often." It might take some sizable effort to produce more variety and contrast in a bi-weekly column, but I'm fairly sure people would pay more attention and the accusation of "shrillness" would go away.

Jim G writes: “There were no problems with mortgage and other kinds of long-term lending generally -- when deflation is expected nominal loan terms are adjusted to give lenders the competitive market real return they need, just as terms are adjusted to do so when inflation is expected.”
Perhaps you are underestimating how close to LIBOR many of the large financial institutions and nonfinancial corporations are borrowing. A drop to a true deflationary environment (even say -0.5%) would immediately cause a surge in real rates in this credit spectrum, slow borrowing and cause a liquidity squeeze on the part of many of the strongest borrowers out there. Please comment.

"Bright ideas welcomed..."

The two most obvious: (1) Don't fecklessly cut taxes for the upper brackets, and (2) don't pitch $200 billion or so into useless schemes of Middle east conquest . . .

Brad, your time-scale argument is couched in language that suggests future economic developments are pre-determined to a greater degree than they are.
With governments and central banks having effective macro-economic policy arsenals at their disposal, accelerating inflation can only be described as being intentional, i.e., impossible without a decision to follow unsound policies, but usually reversible by abandoning those policies or recalibrating the parameters.
Depressionary deflation is all about economic actors watching the numbers and losing faith in the expectations game as it is played by governments and central banks. It involves systemic crisis.
The Fed can, of course, decide to make use of the monetary policy options outlined by Ben Bernanke in his November speech. Without knowing if it will do so, there is not much value in single-scenario long-term projections.
I do think that successful inflation prevention involves the acceptance of economic constraints on the political system - whereas depressionary deflation indicates that the economic system goes into auto-immune suppression under the burdens placed on it by the political system.
Such a (depressionary) deflation is not what Japan and Germany are currently going through, but it was what struck the world in the 1930s. Is it entirely unthinkable that attempts at reflation in the U.S would unintentionally provoke a repeat performance? Or are there reasons to believe that such a policy choice is assured to yield stagflation as its worst-case outcome?
Just asking. You really seem to not think about the depressionary variant of deflation at all. If you do, I have no idea why you are confidently predicting it would be dealt with within five years. The 1930s featured global economic disintegration. Suppose that took hold again - with the Doha round failing due to European and Japanese protectionism and the US being confronted with a backlash against its current course of unilateral interventionism? This is, after all, not an age where the US has the financial wherewithal to implement Marshall plans right and left as regional crises pop up. In fact, it rather seems like the current administration´s Iraq policy is designed to serve as a Marshall plan in reverse - with most of the world pretty much disbelieving that it could possibly work out the way the administration calculates it would.
(And I did not even quote Buffett or Edward Hugh yet...)

Paul Krugman is critical of the looney economic policies of this Administration [poor dears]. I suggest more and more criticism is due. Hooray for the courage, wish there were lots lots more.

Brad, your time-scale argument is couched in language that suggests future economic developments are pre-determined to a greater degree than they are.
With governments and central banks having effective macro-economic policy arsenals at their disposal, accelerating inflation can only be described as being intentional, i.e., impossible without a decision to follow unsound policies, but usually reversible by abandoning those policies or recalibrating the parameters.
Depressionary deflation is all about economic actors watching the numbers and losing faith in the expectations game as it is played by governments and central banks. It involves systemic crisis.
The Fed can, of course, decide to make use of the monetary policy options outlined by Ben Bernanke in his November speech. Without knowing if it will do so, there is not much value in single-scenario long-term projections.
I do think that successful inflation prevention involves the acceptance of economic constraints on the political system - whereas depressionary deflation indicates that the economic system goes into auto-immune suppression under the burdens placed on it by the political system.
Such a (depressionary) deflation is not what Japan and Germany are currently going through, but it was what struck the world in the 1930s. Is it entirely unthinkable that attempts at reflation in the U.S would unintentionally provoke a repeat performance? Or are there reasons to believe that such a policy choice is assured to yield stagflation as its worst-case outcome?
Just asking. You really seem to not think about the depressionary variant of deflation at all. If you do, I have no idea why you are confidently predicting it would be dealt with within five years. The 1930s featured global economic disintegration. Suppose that took hold again - with the Doha round failing due to European and Japanese protectionism and the US being confronted with a backlash against its current course of unilateral interventionism? This is, after all, not an age where the US has the financial wherewithal to implement Marshall plans right and left as regional crises pop up. In fact, it rather seems like the current administration´s Iraq policy is designed to serve as a Marshall plan in reverse - with most of the world pretty much disbelieving that it could possibly work out the way the administration calculates it would.
(And I did not even quote Buffett or Edward Hugh yet...)

Krugman is shrill ... shrill as a smoke alarm, and equally indispensible.

Brad, your time-scale argument is couched in language that suggests future economic developments are pre-determined to a greater degree than they are.
With governments and central banks having effective macro-economic policy arsenals at their disposal, accelerating inflation can only be described as being intentional, i.e., impossible without a decision to follow unsound policies, but usually reversible by abandoning those policies or recalibrating the parameters.
Depressionary deflation is all about economic actors watching the numbers and losing faith in the expectations game as it is played by governments and central banks. It involves systemic crisis.
The Fed can, of course, decide to make use of the monetary policy options outlined by Ben Bernanke in his November speech. Without knowing if it will do so, there is not much value in single-scenario long-term projections.
I do think that successful inflation prevention involves the acceptance of economic constraints on the political system - whereas depressionary deflation indicates that the economic system goes into auto-immune suppression under the burdens placed on it by the political system.
Such a (depressionary) deflation is not what Japan and Germany are currently going through, but it was what struck the world in the 1930s. Is it entirely unthinkable that attempts at reflation in the U.S would unintentionally provoke a repeat performance? Or are there reasons to believe that such a policy choice is assured to yield stagflation as its worst-case outcome?
Just asking. You really seem to not think about the depressionary variant of deflation at all. If you do, I have no idea why you are confidently predicting it would be dealt with within five years. The 1930s featured global economic disintegration. Suppose that took hold again - with the Doha round failing due to European and Japanese protectionism and the US being confronted with a backlash against its current course of unilateral interventionism? This is, after all, not an age where the US has the financial wherewithal to implement Marshall plans right and left as regional crises pop up. In fact, it rather seems like the current administration´s Iraq policy is designed to serve as a Marshall plan in reverse - with most of the world pretty much disbelieving that it could possibly work out the way the administration calculates it would.
(And I did not even quote Buffett or Edward Hugh yet...)

Krugman prints falsehoods about political opponents in order to do them damage, and is rather more forgiving of dishonesty among those who have ideology that is more congreunt with his own. Somewhere in this thread, a supporter of Krugman brought up the name of Ann Coulter as an example of a "shrill" commentator on the other end of the political spectrum, which begs the question of what a shame it is that someone with Krugman's academic stature has reduced himself to the point that his defenders compare him with a loudmouth whose primary qualifications are short skirts and nice legs.

What is with this cracker-jack website? I'm strictly talking about the software. I've never seen a web forum where there were so many duplicate posts, or one which used pop-ups to view commentary threads. And a forum where you see the poster's name -after- you have read the comment? And no means to filter out the usual trolls and jokers? Come on, this is technology from the old dial up BBS era.

Maybe the Prof. can assign some undergrad the project of transitioning to better forum software. It is out there, it is free, and it is documented. Just needs someone to take the time to make a switch.

Besides all the duplicate posts, an informative thread. Thanks.

"So what Japan really needs to do is print a boatload of more yen."
That just is not true. They have expanded the money supply very significantly. Why does nobody ever look at the velocity statistics? Those show a decrease that offsets the supply increase.
BTW, according to the newest data, the US savings rate has doubled. That is part of the reason why I consider the fixed timeframe Brad outlines in his post to be pretty questionable.
Just saw that the MT comments system uses CGI. Hopefully they are going to switch to some less cumbersome solution...(No, it is not just the Opera browser that multi-posts. The problem is on the receiving end.)

Bob Novak is a supply sider? I thought he was just joking when he discusses economics . . .

I think 2000 words twice a week would be better. A once-a-week column might hurt his influence. I think that the brevity of the columns has been good for his writing style as well as helping the public, which has little time and less attention, consume complex ideas that they would not get otherwise.

Anyone who says Krugman is shrill hasn't honestly grappled with Krugman has been saying.

What -- are you all whacked out on Xanax or osmething! Think about the implications of Bush:

1) defrauding the country out of trillions of dollars
2) based on lies about the effects of his economic policy
3) where their policy (supply-side economics)is essentially a hoax anyway (however qualified your favorite statements of SSE may be, the Bush Administration says they will decrease deficits, which is preposterous)
4) at the expense of millions of people's retirement and health care

Krugman has been documenting in detail the immoral Republican assault on the Treasury and the Truth. He is perhaps the most prominent among the ever increasing number who are demonstrating that the Emperor Wears No Clothes. The Republicans are shamelessly defrauding the country and lying their asses off in the process.

Wake up boys! This means you Liazos, Picerno, and paul. It's not that Krugman's shrill, you're just dull-witted.

Thank you to The Fool & RonK.

Krugman sounds shrill because he is truly afraid of what this administration is doing to our country.

We're about to embark on a foreign adventure that the administration can't justify to anyone. In his press conference, all Bush would do is repeat his sound bites, "disarmament", "regime change", "moral clarity."

And that doesn't even begin to go into the damage he is doing to our economy. Or the innumerable conflicts of interest in his administration.

The evening news reminds me a Nazi rally. "America just tested the biggest conventional bomb ever built". The implication is "Don't you feel proud"

I feel shrill. I feel like I'm watching the country I love turn into something horrifying.

Krugman is one of the only mass media voices putting any of the pieces together and it scares the sh*t out of him.

"Buf if we were in a period of deflation with high inflation anticipated because of the pending national insolvency, hmmm, we could have a deflationary period where long rates were so high to protect lenders against the anticipated inflation that nobody could afford to borrow. That would be an oddity."

Sure why not. All that would mean is there is plenty to go around now but there will be a squeeze in the future. A steep yield curve indicates just that. But it's not like the baby boomers all retire the same year. It happens over 20 years. We'll need to swing from trade deficit to probably a surplus over some period too. Depending on the productivity growth, there will be maybe a decade of stagnating living standards starting in several years. Not really fun, but not the end of the world either. Our current strategy is the right one anyway--build all the houses we're gonna need now.

http://www.frbsf.org/images/pdfcharts/el98-20c.pdf

>>Yeah, but the real question is: why does Krugman have a mortgage in the first place? He makes a ton of money and claims that he lives in a modest house. So why doesn't he just pay it off?<<

The tax shield. Borrow to buy the house, and take the money you would have spent on the house and (over a bunch of years) stuff it into some other tax-preferred account like a 401(k). Unless your 401(k) and equivalents do really badly, the fact that your money is compounding untaxed and that the government pays 40% or so of your mortgage interest more than offsets the interest rate spread and the mortgage origination fees...

As CBPP reported, "Bush said in November that the deficit would have been “much bigger” without the 2001 tax cut, meaning that the tax cut is substantially more than paying for itself...Subsequently, the President said...
[t]hat growth will bring the added benefit of higher revenues for the government. Similarly, Vice President Cheney has said that the new “growth” package the Administration has proposed would ultimately more than pay for itself. Likewise... “on February 8, press secretary Ari Fleischer said the [new tax] plan would pay for itself.”...on January 8...House Majority Leader Tom Delay...“told reporters that the long-term revenues generated by tax relief would more than cover the price tag of the cuts.”...Senator John Sununu stated “that the tax cuts would actually bring long-term deficits down.”

The above makes it clear that the Bush Administration is pushing an extreme (and delusional)form of supply-side economics and making wildly inaccurate claims about the effects of tax cuts.

Given his argument, then, Krugman is not being shrill. Rather, his tone of righteous indignation is the appopriate one. Krugman cannot be said to be shrill unless is he is substantially wrong. If he is wrong about Bush, then let's see the argument that proves that he is wrong. All we're seeing here are whiny little complaints about his tone.

As CBPP reported, "Bush said in November that the deficit would have been “much bigger” without the 2001 tax cut, meaning that the tax cut is substantially more than paying for itself...Subsequently, the President said...
[t]hat growth will bring the added benefit of higher revenues for the government. Similarly, Vice President Cheney has said that the new “growth” package the Administration has proposed would ultimately more than pay for itself. Likewise... “on February 8, press secretary Ari Fleischer said the [new tax] plan would pay for itself.”...on January 8...House Majority Leader Tom Delay...”told reporters that the long-term revenues generated by tax relief would more than cover the price tag of the cuts.”...Senator John Sununu stated “that the tax cuts would actually bring long-term deficits down.”

The above makes it clear that the Bush Administration is pushing an extreme (and delusional) form of supply-side economics and making wildly inaccurate claims about the effects of tax cuts.

Given his argument, then, Krugman is not being shrill. Rather, his tone of righteous indignation is the appopriate one. Krugman cannot be said to be shrill unless is he is substantially wrong. If he is wrong about Bush, then let's see the argument that proves that he is wrong. All we're seeing here are whiny little complaints about his tone.

As CBPP reported, "Bush said in November that the deficit would have been “much bigger” without the 2001 tax cut, meaning that the tax cut is substantially more than paying for itself...Subsequently, the President said...[t]hat growth will bring the added benefit of higher revenues for the government. Similarly, Vice President Cheney has said that the new “growth” package the Administration has proposed would ultimately more than pay for itself. Likewise... “on February 8, press secretary Ari Fleischer said the [new tax] plan would pay for itself.”...on January 8...House Majority Leader Tom Delay...”told reporters that the long-term revenues generated by tax relief would more than cover the price tag of the cuts.”...Senator John Sununu stated “that the tax cuts would actually bring long-term deficits down.”

The above makes it clear that the Bush Administration is pushing an extreme (and delusional) form of supply-side economics and making wildly inaccurate claims about the effects of tax cuts.

Given his argument, then, Krugman is not being shrill. Rather, his tone of righteous indignation is the appropriate one. Krugman cannot be said to be shrill unless is he is substantially wrong. If he is wrong about Bush, then let's see the argument that proves that he is wrong. All we're seeing here are whiny little complaints about his tone.

Sorry about the topic drift thing, but, considering all the various stuff that's likely about to happen, what should my friend who's teaching French in Japan be doing with her money?

"The tax shield. Borrow to buy the house, and take the money you would have spent on the house and (over a bunch of years) stuff it into some other tax-preferred account like a 401(k). Unless your 401(k) and equivalents do really badly, the fact that your money is compounding untaxed and that the government pays 40% or so of your mortgage interest more than offsets the interest rate spread and the mortgage origination fees..."

Well exactly! This is why the U.S. economy is and will be going down the tubes. Americans borrow against their (overvalued) house and put it towards their retirement. This retirement money is put into the stock or bond markets, in the hopes that their will be future cash flows. CEOs take this money, and instead of investing it to generate these future cash flows to, pocket it (or invest it at great risk - in order to boost the value of their options - and so eventually squander it). The crash comes when people realize that they don't have the retirement cash flows they imagined - and they still have to pay off the house.

The tax shield. Borrow to buy the house, and take the money you would have spent on the house and (over a bunch of years) stuff it into some other tax-preferred account like a 401(k). Unless your 401(k) and equivalents do really badly, the fact that your money is compounding untaxed and that the government pays 40% or so of your mortgage interest more than offsets the interest rate spread and the mortgage origination fees...

Well exactly! Thank you Prof DeLong! This is the best explanation yet why the American economy is and will be going down the tubes (extra points: you can decide whose fault it is). Mr. K borrows against an overvalued house to invest in his retirement. This retirement money is put into the stock or bond markets, to generate future cash flows so that Mr. K can live and pay his bills without working. CEOs take this money and either (1) pocket it or (2) invest it in very risky enterprises in the hopes of boosting the value of their stock options - and thereby ending up squandering it. The crash comes when people when that there are, alas, no future cash flows. What they do have is a (now fairly valued) house and too much debt.

"The tax shield. Borrow to buy the house, and take the money you would have spent on the house and (over a bunch of years) stuff it into some other tax-preferred account like a 401(k). Unless your 401(k) and equivalents do really badly, the fact that your money is compounding untaxed and that the government pays 40% or so of your mortgage interest more than offsets the interest rate spread and the mortgage origination fees..."

Well exactly! Thank you Prof DeLong! This is the best and most concise explanation I've seen why the American economy is and will be going down the tubes (extra points: you can decide whose fault it is). Mr. K borrows against an overvalued house to invest in his retirement. This retirement money is put into the stock or bond markets, to generate future cash flows so that Mr. K can pay his bills without working. CEOs take this money and either (1) pocket it or (2) invest it in very risky enterprises in the hopes of boosting the value of their stock options - and thereby ending up squandering it. The crash comes when people realize that there are, alas, no future cash flows for their retirement. What they do have is a (now fairly valued) house and too much debt.

Apologies for the three posts. Apparently the "Cancel" button doesn't work as expected.

An ingenious attempt, Brad, but an unsuccessful one. Let's look again at the sentence that so confused poor Mickey:

[u]nless we slide into Japanese-style deflation, there are much higher interest rates in our future.

If deflation and (inflation-induced) higher interest rates are co-possible scenarios playing out on different time scales, then what's that word "unless" doing there? If your exegesis were really what Krugman had in mind, wouldn't he have to say that higher interest rates are in our future whether there's an intervening short-term deflationary episode or not?

I don't think anyone's adequately answered Jim Glass' point about timing. If Krugman has to lock in a low rate right now because the public's propensity to save and invest is going to take a dive in the very near future in anticipation of future deficits, doesn't that mean that the public's propensity to spend is going to take a jump in the very near future? In which case why are talking about deflation at all?

I can scarcely believe that some questions remain unasked, but let me toss in a couple:

(1) Does this mean we do not need to worry about a housing market bubble? As markets commence to worry about future inflation, surely that will be a prop to real estate prices.

Or perhaps there will be a whipsaw - deflation, homeowners creaming for relief, the will to control inflation gone, Congress and the Fed to the rescue, and a dramatic overshoot resulting in hyperinflation! Cool.

(2) Social Security has COLAs linked to wages. Lots of Gov't debt is short term, and will be re-issued at higher rates as the expectation of onflation settles in. Can the Government really hyper-inflate its way out of this, or will it be clear that the amount of fixed rate long term debt available to expropriate is too small a fraction of the total Gov't obligations?

Again, YES! If we can hyper-inflate beyond people's expectations, wages and interest rates will never catch up. Hold on!

(3) Regime change: Krugman refers to "some future administration". An evil Republican one? Is Krugman so gloomy as to imagine that Dems are unelectable at the national level for the foreseeable future? It's the McCain-Feingold effect! Or does Krugman see irresponsible Dems in the cards, or crystal ball, or whatever he is using? C'mon, Hillary! won't let the country down.

Paul, nobody answered Jim because Krugman wasn't making a point on market timing. He was not saying that now is the best time to lock in your mortgage. A fixed mortgage only serves as an example of a smart response to the scenario laid out in his article. Low rates now combined with high rates later makes locking in mortgage rates a good idea near-term. The exact near-term timing is not pertinent.

Slightly OT: if everyone refinances their mortgages right now, locking in 5% for 30 years, and a few years from now as interest rates start to climb people stop buying houses: does that force Fannie Mae into insolvency? Because she holds all these debts at below market rates and is not getting new debts at market rates fast enough? I don't have much understanding of this stuff but would appreciate any insight you have to offer.

>>Japanese-style deflation<<

I read "Japanese-style deflation" to refer not to the kind of two- to three-year episode of declining prices that I think is a dangerous possibility, but something much worse--something like what has happened to Japan over the past decade and a half. I have too much confidence in Greenspan, Kohn, Bernanke, and company to think that that is a possibility.

May I make an overdue correction to my earlier post? I would rather express my thought as "homeowners screaming for relief", as an additional political impetus for high inflation following a bout of deflation.

And, a bonus - high inflation will make McCain Feingold even less workable when $2000 can't buy a loaf of bread. Campaign finance reform that works!

The simple fact, as Kaus was gently pointing out, is that Krugman is so obsessed with the Bush administration, that he will pick up any stick to beat them, regardless of intellectual consistency. Given this, the correct number of words per week for Krugman, unless he agrees to stick to subjects that (1) he knows something about, and (2) he can treat rationally, is zero. Here's a post dissecting a recent Krugman column if you want an example:
http://www.seanet.com/~jimxc/Politics/March2003_2.html#jrm773

"Shrillness". In the first place, this probably really is a RNC recommended talking-point being propagated throught the vaporsphere by the usual suspects. People who think that that's paranoia are naive.

I make a point of being shrill and people often don't like it. With regard to the Bush administration, I systematically put the worst construction on what they do and never take anything at face value. I do not give them the benefit of the doubt. This is the default position at which I have set my thermostat. As a default position, it is exactly as rational as being positive and taking everything at face value. I am the devil's advocate.

Furthermore, it's also just as rational as setting your thermostat at the middle and giving everything a moderate interpretation. Everybody uses default positions and set-points, which are in the area of general philosophy and standard operating procedure -- the way you dispose of uncertain cases where you can't be completely sure. A default position is not a factual statement; it's your hunch as to the best way to operate in a complex situation.

If the Bush administration is a very bad one, then Krugman and I are right. If it's a normal, average one, the moderates are right. If it is what it believes it is, the Pollyannas are right. My hunch is that it's a very bad one and should not be given the benefit of the doubt. History will tell.

And if what Krugman's been saying is true, he should keep saying even if people find it repetitious and boring. He's talking about pretty important questions.

In the media world of today, I have to be intensely suspicious of anyone who focusses his criticisms on Krugman's work, Helen Thomas's work (just criticized by Slate), Seymour Hersh's work, etc. The reality we're facing is the exclusion of critical left-center voices from the major media entirely. If you do a microscopic examination of any writer you will find flaws; when these investigations zero in on the few critical writers there are, something smells very fishy.

zizka, attacking the messenger is a popular political method of avoiding the message when the facts inconviently support it. Krugman is using fairly well accepted economic concepts to support his contentions.

Jeremy, check out the opeds in yesterday's Washington Post. There is a piece on derivatives that you will find informative.

Thanks, Stan

I'm a liberal, a huge fan of Krugman, and have read several of his books. But I stopped reading his NYT's stuff because it's pained me to watch him become, yes, "shrill". He's lost credibility because of it, even with me. I understand *why* he's become shrill, I think. *I've* become shrill about this administration, which I despise. But I'm not in the unique position Krugman is in, and I'm not wasting my intellectual capital like he is.

By the way, Kevin Drum has a good post about words like "shrill" at:

http://calpundit.blogspot.com/2003_01_26_calpundit_archive.html#88249954

Suppose you were a sixty-year-old Japanese retiree. You expect to live another 25 years. You've got a fixed amount of yen assets you've accumulated, and, if you're very lucky, the return on these assets has been 0% for a long time. So you're spending as little as you can to avoid running out of money before you die. Now suppose the Bank of Japan adopts an inflation target. Asset returns are still lousy, because markets haven't adjusted yet. Will you start spending more in anticipation of higher prices in the future or much less so that your consumption won't go to zero before you die?

Keith prattled on about being a liberal to lend support to the contention that Krugman is being shrill.

Keith, I'm a Republican and if Krugman is correct, we should all be shrill.

The Administration is bent on economic policies that will wreck havoc through the middle class as our parents or we approach retirement age. Paul Krugman is a splendid splendid voice trying to alert us.

Thank you Paul Krugman and Brad DeLong.

RE: the Japanese retiree. Well, if you have two situations, inflation or deflation, and assuming flat asset returns (I'm not sure it would take very long for capital markets to adjust, but I'll work with you on this one). Of course you want your money to last, but the way to get the most value out of that money is to spend it now rather than in five years when it will be worth less. Obviously you won't be able to spend it on perishable items, but on any kind of durable goods that the person is planning on purchasing, the right decision would be to buy it now. With deflation, the right decision would be to put off the purchase as long as possible since the price will keep going down.

RE: the Japanese retiree. Well, if you have two situations, inflation or deflation, and assuming flat asset returns (I'm not sure it would take very long for capital markets to adjust, but I'll work with you on this one). Of course you want your money to last, but the way to get the most value out of that money is to spend it now rather than in five years when it will be worth less. Obviously you won't be able to spend it on perishable items, but on any kind of durable goods that the person is planning on purchasing, the right decision would be to buy it now. With deflation, the right decision would be to put off the purchase as long as possible since the price will keep going down.

Keith -- in what sense is Krugman hurting his reputation with this? People are not saying he's wrong -- you didn't say so yourself. If the economics fraternity is somehow troubled by the fact that he's saying these things, aren't they a pretty worthless bunch of monkeys?

Zizka - What a gem you are.

The Administration is waging a class war, a war against the middle class. Perhaps this seems shrill, but this Administration is deserves all the shillness we can muster. Fortunately there are voices such as Paul Krugman who are not cowed and are describing and explaining just what the Administration is about. Of course, there is always Fox News for those of you who care for gentility and fairness. Remember Fox News?

The Simpsons ran a mock news crawl on Sunday: "Fox News - 92% of Democrats are gay."

Guess who I read first every Tuesday and Friday in the NYTimes? Speaking of shrill, Mureen Dowd can shrill with the best and is she ever.

http://www.nytimes.com/2003/03/12/opinion/12DOWD.html

March 12, 2003

I Vant to Be Alone
By MAUREEN DOWD - NYTimes

It will go down as a great mystery of history how Mr. Popularity at Yale metamorphosed into President Persona Non Grata of the world.

The genial cheerleader and stickball commissioner with the gregarious parents, the frat president who had little nicknames and jokes for everyone, fell in with a rough crowd.

Just when you thought it couldn't get more Strangelovian, it does. The Bush bullies, having driven off all the other kids in the international schoolyard, are now resorting to imaginary friends....

I am having a hard time understanding how once can tell when a columnist is being "shrill." As I understand the word, it refers to sharp, high-pitched sounds. Perhaps people imagine Krugman speaking in a high-pitched voice when they read his columns? When I read Krugman, I usually imagine him reading in a calm, bemused voice. I guess I don't understand precisely what criticism is lurking behind the label "shrill."

Jim Miller: your link to the "dissection" of the Krugman column is pathetically weak.

Everyone knows that when Krugman is accused of being "shrill" it's because of his assiduous tormenting of the Bush Administration for their ridiculous and fraudulent fiscal policies. Your dissection doesn't even address that.

You either have to present evidence that Krugman is wrong about the serious charges he offers against Bush's fiscal policies or shut up. Complaints about his tone or his originality etc. just prove that none of you smug Republicans can touch him on substance.

Whether Krugman was actually talking about the timing of his projected interest-rate jump is immaterial, really. Surely the point is that he SHOULD be talking about it, given that the information which leads him to believe in the jump is also known to the rest of the market? Depending on how strong a form of the Inefficient Market/Efficient Krugman Hypothesis you're willing to embrace, mortgage rates could go through the roof tomorrow for all we know.

Oooh, time to play lese majeste again:

>>I read "Japanese-style deflation" to refer not to the kind of two- to three-year episode of declining prices that I think is a dangerous possibility, but something much worse--something like what has happened to Japan over the past decade and a half. I have too much confidence in Greenspan, Kohn, Bernanke, and company to think that that is a possibility.<<

Brad, are you completely sure that it's in the Fed Board's powers to prevent deflation? Don't you think that if the economy sinks even more due to further bearishness or MidEast disaster, more attempts at monetary expansion will land into the liquidity trap? Namely, the Fed can pump as many reserves as it wants to into the banking system, but if corporations and households are too worried about their financial position to borrow, or if banks are likewise, then the effect on total spending may well be negligible. Alternatively, the Fed could feed the extra reserves directly to the Treasury (i.e., print money). God knows what the financial markets will think of that.

To my mind, the real people whom we have to rely on to get the country out of deflation are not in the Fed Board. Rather, it's whathisname at the SEC who has to restore confidence in corporate finances and governance--only such reforms will reduce money demand and allow monetary policy to work again.