Must-Read: Stephen Roach: China’s Complexity Problem

Must-Read: Stephen Roach: China’s Complexity Problem: “There are many moving parts in China’s daunting transition…

..to what its leaders call a moderately well-off society…. Is China’s leadership up to the task?… The far bigger story is its economy’s solid progress on the road to rebalancing…. Services activity grew 8.4% year on year in the first half of 2015, far outstripping the 6.1% growth in manufacturing and construction…. China’s employment trends have held up much better than might be expected in the face of an economic slowdown…. Services are also the ingredient that makes China’s urbanization strategy so effective. Today, approximately 55% of China’s population lives in cities, compared to less than 20% in 1978….

While progress on economic rebalancing is encouraging, China has put far more on its plate: simultaneous plans to modernize the financial system, reform the currency, and address excesses in equity, debt, and property markets… [plus] an aggressive anti-corruption campaign, a more muscular foreign policy, and a nationalistic revival couched in terms of the “China Dream.”… China could inadvertently find itself mired in something comparable to what Minxin Pei has long called a “trapped transition,” in which the economic-reform strategy is stymied by the lack of political will in a one-party state…. As warnings about the “middle-income trap” underscore, history is littered with more failures than successes in pushing beyond the per capita income threshold that China has attained. The last thing China needs is to try to balance too much on the head of a pin. Its leaders need to simplify and clarify an agenda that risks becoming too complex to manage.

Must-Re-Read: Paul Krugman: Secular Stagnation, Coalmines, Bubbles, and Larry Summers

Must-Re-Read: Yes, you do need to reread this. And I do still find myself disturbed by a division in the ranks of those of us economists who I think have some idea of what the elephant in the room us. Some of us–Rogoff, Krugman, Blanchard, me–think our deep macro economic problems could be largely solved by the adoption and successful maintenance of a 4%/year inflation target in the North Atlantic. Others–Summers, Bernanke–do not. They appear to think that a strongly negative natural real safe rate of interest (there’s at mouthful!) will cause sigificant problems even if 4%/year inflation allows a demand-stabilizing central to successfully do its job without hitting the zero lower bound.

My failure to comprehend why they think this disturbs me, for I would have said that my mental model of Bernanke thought is very good. And I would have said that the sub-Turing evocation of Summers that I am currently running on my wetware is world-class:

Paul Krugman (2013): Secular Stagnation, Coalmines, Bubbles, and Larry Summers: “I’m pretty annoyed with Larry Summers right now…

…His presentation at the IMF Research Conference is, justifiably, getting a lot of attention. And here’s the thing…. Larry’s formulation is much clearer and more forceful, and altogether better, than anything I’ve done. Curse you, Red Baron Larry Summers! OK, with professional jealousy out of the way, let me try to enlarge on Larry’s theme….

Larry’s formulation… is the same as my own… works from the understanding that… monetary policy is de facto constrained by the zero lower bound… [and] in this situation the normal rules of economic policy don’t apply…. This is the kind of environment in which Keynes’s hypothetical policy of burying currency in coalmines and letting the private sector dig it up… becomes a good thing…. Larry also indirectly states an important corollary: this isn’t just true of public spending. Private spending that is wholly or partially wasteful is also a good thing…. This is… standard, although a lot of people hate, just hate, this kind of logic–they want economics to be a morality play, and they don’t care how many people have to suffer in the process. But now comes the radical part of Larry’s presentation: his suggestion that this may not be a temporary state of affairs…. The point is that it’s not hard to think of reasons why the liquidity trap could be a lot more persistent than anyone currently wants to admit….

The underlying problem in all of this is simply that real interest rates are too high…. The market wants a strongly negative real interest rate, [and so] we’ll have persistent problems until we find a way to deliver such a rate. One way to get there would be to reconstruct our whole monetary system–say, eliminate paper money and pay negative interest rates on deposits. Another way would be to take advantage of the next boom–whether it’s a bubble or driven by expansionary fiscal policy–to push inflation substantially higher, and keep it there. Or maybe, possibly, we could go the Krugman 1998/Abe 2013 route of pushing up inflation through the sheer power of self-fulfilling expectations….

Oh, and one last point. If we’re going to have persistently negative real interest rates along with at least somewhat positive overall economic growth, the panic over public debt looks even more foolish than people like me have been saying: servicing the debt in the sense of stabilizing the ratio of debt to GDP has no cost, in fact negative cost…. What Larry did at the IMF wasn’t just give an interesting speech. He laid down what amounts to a very radical manifesto. And I very much fear that he may be right.


Gavyn Davies (2013): The implications of secular stagnation: “The alleged consequence of the fact that the actual real rate is above the equilibrium…

…is that there has been a prolonged period of under-investment in the developed economies, with GDP falling further and further behind its underlying long run potential. In a largely unsuccessful effort to close the gap, the central banks have created asset price bubbles (technology stocks in the late 1990s, housing in the mid 2000s and possibly credit today), since this has been the only means available to boost demand…. If they are right, is that the problem of under-performance of GDP will last for a very long time, and will not solve itself through flexibility in prices and interest rates…. The normal route through which monetary policy works, by bringing forward consumption from the future into the present, is unlikely to be successful…. There will still be a shortage of demand when the future comes around…. Calls for fiscal action are bound to intensify…. The conclusion about public investment now seems to be supported by most shades of professional economic opinion, including Ken Rogoff at the IMF conference. Yet there is little sign of it happening on any significant scale.

Paul Krugman (2013): Bubbles, Regulation, and Secular Stagnation: “Looking at current macroeconomic policy…

…the obvious question is, stupid or evil? And the obvious answer is, why do we have to choose? But it is… at any rate soothing… to think about the longer-term future…. I recently talked about some of these issues with Adair Turner… (just to be clear, Adair bears no responsibility for any errors or confusion in what follows). In brief, there is a case for believing that the problem of maintaining adequate aggregate demand is going to be very persistent–that we may face something like the “secular stagnation” many economists feared after World War II….

When the Minsky moment came, there was a rush to deleverage; this drove down overall demand for any given interest rate, and made the Wicksellian natural rate substantially negative, pushing us into a liquidity trap…. How should pre-2008 policy have been different? And what should policy look like looking forward? There are many economic commentators who take rising leverage, asset bubbles and all that as prima facie evidence that monetary policy was too loose…. The trouble with this line of argument is that if monetary policy is assigned the task of discouraging people from excessive borrowing, it can’t pursue full employment and price stability, which are also worthy goals (as well as being the Fed’s legally binding mandate)…. Since the US economy shows no signs of having been overheated on average from 1985 to 2007, the argument that the Fed should nonetheless have set higher rates is an argument that the Fed should have kept the real economy persistently depressed, and unemployment persistently high…. That’s quite a demand. Many of us would therefore argue that the right answer isn’t tighter money but tighter regulation….

Our current episode of deleveraging will eventually end, which will shift the IS curve back to the right. But if we have effective financial regulation, as we should, it won’t shift all the way back to where it was before the crisis…. And here’s the worrisome thing: what if it turns out that we need ever-growing debt to stay out of a liquidity trap?… Bear in mind that interest rates were actually pretty low even during the era of rising leverage, and got worryingly close to zero after the 2001 recession and even, you might say, after the 90-91 recession (there was talk of a liquidity trap even then)….

One answer could be a higher inflation target, so that the real interest rate can go more negative. I’m for it! But you do have to wonder how effective that low real interest rate can be if we’re simultaneously limiting leverage. Another answer could be sustained, deficit-financed fiscal stimulus. But, you say, this would lead to exploding public debt! Actually, no–not if the real interest rate is persistently below the economy’s growth rate….

OK, I’m shooting from the hip here. The main point is simply that the weirdness of our current situation may well go on much longer than anyone currently imagines.

Jared Bernstein (2013): Paul, Larry, Secular Stagnation, and the Impact of Negative Real Rates: “Paul K was as impressed with the recent words of Larry S as I was…

…I’d like to further elaborate and pose a question to Paul and Larry (really, Larries—Summers and Ball) and, of course, anyone else who’d like to weigh in…. Larry’s analysis is… compelling… [because] it’s framed quite cozily in neoclassical thinking… and simple empirics…. Many years post-panic, we still have large output gaps and no evidence of price pressures.  The zero-bound is constraining Fed policy, and thus we must do more with economic policy, not less…. [This] suggests a level of secular stagnation that I and others have been worrying about for a very long time… [is] behind my conviction… my life’s work… that left to its own devices, the market can’t be counted on to generate full employment….

In the spirit of recognizing limits of interest rate policy, how certain are those of us who advocate this position—which given today’s ZLB means higher inflation to achieve lower real rates—that it would help much? At first blush, this is simple IS-LM stuff—history is very clear that the IS curve slopes down…. But there’s something about “secular stagnation” that has a way of messing with old rules…. Many observers of the US economy have worried about the impact of financialization… the bubble machine… the devotion of considerable resources to non-productive activities…. Who out there thinks financial markets are playing their necessary role of allocating excess savings to their most productive uses?…

So, I’m totally with the program re getting the real interest rate down… But I’m nervous that it might not be as effective as historical correlations would suggest. I’d be interested in Paul and Larries responses.

Donald Trump and Right-Wing Anti-Politics Parties Through the Poiltical-Economy Lense of National Medicarism

There have long been many who fear immigration–or people who look and speak differently–and who fear social change–or social difference–while not loving a market economy that leaves them without security and vulnerable to falling into poverty because of incomprehensible decisions made by bankers thousands of miles away. There has long been an argument about whether this mode of thought is primarily the foundation of the republican virtue tradition (cf. Edmund S. Morgan: American Slavery, American Freedom); primarily a con game run by the rich against the non-rich (cf. Franz Neumann: Behemoth; William Freehling: The Road to Disunion); or primarily simply a somewhat-confused but not insane set of political doctrines that was taken over by Hitler and has thus lost legitimate modes of expression since the end of World War II. Whatever it is, this is Trumpism. And, since 1945, as Matthew Yglesias writes:

thinkers who define ideological space have decreed… nationalist principles… pare… with small government… and cosmopolitan principles… pare… with economic egalitarian[ism]…. But many actual voters see it differently…

Now there is the fact that in a country with native demography near zero population growth and thus with an aging society, hatred of immigrants and love of social insurance really do not go together at all. National Socialism competing for economic and other advantages against other nations trying to hog the world’s global societal surpluses may be a coherent doctrine that adds up. National Medicarism does not. Yglesias:

Matthew Yglesias: To Understand Donald Trump, Look to Europe[‘s] Far-Right: “Populist conservatives… [claim] that if we weren’t wasting so much money on welfare for migrants…

…retirement programs would be easily affordable. This simply isn’t true…. More immigration means at least marginally faster productivity growth, immigrants improve the ratio of working-age to retired people, and foreign-born health care providers help contain the cost of caring for the elderly.

Desire for social insurance, hatred of immigrants, fear that the haves–not so much the billionaires, who are to be admired from their Randite social-darwinist fitness–but, rather,an upper-middle class that knows how to work the system, is stealing your stuff, all adding up to a fear that the system isn’t working for you and people like you. This is not an unexpected thing to see in a world in which rapid economic growth at the top is accompanied by mass stagnation and mass insecurity among those who thought that they were going to make it. And it is all over the place in the North Atlantic:

Matthew Yglesias: To Understand Donald Trump, Look to Europe[‘s] Far-Right: “Newish parties… are gaining support with platforms…

…[of] nationalism… anti-immigrant politics… [plus] a more… [larger] welfare state… the Trump ideological mix…. Their rise has been astoundingly swift, and it tells us a lot about Trump…. As unlikely as Trump’s rise in the polls has been in some ways the rise of the Sweden Democrats is even weirder…. Trumpism, in other words, is much bigger than Donald Trump or the particular pathologies of the US Republican Party. It’s a global phenomenon….

Thinkers who define ideological space have… decreed… nationalis[m]… pair[s]… with small government… and cosmopolitan[ism]… pair[s]… with economic egalitarian[ism]…. But many actual voters see it differently… are both beneficiaries of government programs… while also being skeptical of the kinds of social change brought about by immigration.

And to the extent that the people who think this way are called fascists and Nazis by virtue of these thoughts, they will sooner or later start giving a positive ideological valence to fascism and Naziism.

Yglesias continues:

Sometimes this can express itself in a kind of ‘keep the government’s hands off my Medicare’ ideological confusion. Other times, leaders of mainstream conservative parties can try to square the circle, as when the Republican Party promises to cut Social Security benefits for young people but not for old people…

As my sister points out, it is a very interesting strategy to promise a special set of goodies for a particular group that by agreeing undermine the broader coalition that has created those goodies and also lose the power to block future action to take those goodies away. Thus it seems to me that ideological confusion is the natural strategy of mainstream right-wing parties so far in the twenty-first century. And I believe this is at the root of the current war on science and arithmetic we see in the American Republican Party, and elsewhere.

The replacement of mainstream conservatives by anti-immigration and anti-difference National Medicarists seems to me highly likely, for:

Mainstream conservative[s]… [can’t advocate]… social welfare for retirees because, being parties of the right, they [want]… taxes low…

and, as Sam Brownback’s disastrous rule-by-confidence-game in Kansas shows, ideological confusion can take you only so far when you eventually have to govern.

The problem is that the National Medicarists will be no more friendly toward arithmetic, science, or a reality-based technocratic policy debate about policies that would really work.

Populist conservatives… [claim] that if we weren’t wasting so much money on welfare for migrants, retirement programs would be easily affordable. This simply isn’t true…. More immigration means at least marginally faster productivity growth, immigrants improve the ratio of working-age to retired people, and foreign-born health care providers help contain the cost of caring for the elderly.

The two central planks of National Medicarism–keep out immigrants, and top up Social Security and Medicare–do work against each other given the North Atlantic’s current demography and relative wealth. Someday somebody should write something about how Japan’s lost decades are in large part due to its falling victim to its own version: National Medicarism with Japanese Characteristics…

Things to Read on the Morning of August 25, 2015

Must- and Should-Reads:

Might Like to Be Aware of:

Must-Read: Paul Krugman: Rate Hike Fever

Must-Read: What did Alan Greenspan do in 1987 when the stock market suddenly dropped by 25%? He reduced short-term safe nominal interest rates by 200 basis points.

Graph 3 Month Treasury Bill Secondary Market Rate FRED St Louis Fed

What is the equivalent policy to produce that same amount of monetary easing today, should it become appropriate–as it will, should global stock markets drop by 25%?

Paul Krugman: Rate Hike Fever: “Larry Summers argues that a Fed rate hike would be a big mistake…

…I completely agree. Yet he also suggests that the Fed ‘seems set’ to do this foolish thing. Why?… It’s not like debating monetary policy with the seventeen stooges conservatives whose doctrine tells them that fiat money will turn us into Zimbabwe… and are impervious to evidence. The Fed chair is Janet Yellen; the vice chair is Stan Fischer; both… [of] whose underlying macro worldview is… Larry’s, or mine, not least because we studied under Stan himself. So why the difference on policy?….

Something about being on the inside is making the Fedsters more rate-hike prone… [not] regular contact with Wall Street types… Larry actually has plenty of that too…. [not] extra information: basically the Fed knows no more than anyone [else]… and… Janet and Stan are smart and level-headed enough to get that….

The constant sniping against easy money… may play a role…. I also suspect… the whole culture of central banks… taking away the punch bowl… having the courage to do unpopular things…. The Fed is really, really eager to return to that position–and is, I fear, engaging in wishful thinking, believing much too readily that a return to normalcy is appropriate. It’s not. I’m with Larry here: this attitude has the makings of a big mistake. Think Japan 2000; think ECB 2011; think Sweden. Don’t do it.

None of Concerns About Inflation, Employment, Financial Stability, or Inequality Justify Raising Interest Rates Over the Next Year or So…

Lawrence Summers: The Fed looks set to make a dangerous mistake: “The Federal Reserve’s September meeting [might] see US interest rates go up… and…

…barring major unforeseen developments… will… be increased by the end of the year…. The Fed has been careful to avoid outright commitments. But… raising rates in the near future would be a serious error…

Summers says, correctly, that raising rates would threaten the Fed’s ability to attain its 2%/year inflation target:

More than half the components of the consumer price index have declined in the past six months…. Market-based measures of expectations suggest… the next 10 years[‘] inflation will be well under 2 per cent. If the currencies of China and other emerging markets depreciate further, US inflation will be even more subdued…

It would threaten the Federal Reserve’s ability to fulfill its mandate to deliver maximum feasible employment:

Tightening policy will adversely affect employment levels because higher interest rates make holding on to cash more attractive than investing it. Higher interest rates will also increase the value of the dollar, making US producers less competitive and pressuring the economies of our trading partners…

And this has an extra bonus drawback–it raises inequality:

Studies of periods of tight labour markets like the late 1990s and 1960s make it clear that the best social programme for disadvantaged workers is an economy where employers are struggling to fill vacancies…

The standard argument for raising rates is that it is a way to guard against financial instability. Summers says, again correctly, that if this was ever true it is not true now:

There may have been a financial stability case for raising rates six or nine months ago, as low interest rates were encouraging investors to take more risks and businesses to borrow money and engage in financial engineering….. That debate is now moot. With credit becoming more expensive, the outlook for the Chinese economy clouded at best, emerging markets submerging, the US stock market in a correction, widespread concerns about liquidity, and expected volatility having increased at a near-record rate, markets are themselves dampening any euphoria or overconfidence…. fragility, raising rates risks tipping some part of the financial system into crisis, with unpredictable and dangerous results.

Let me repeat something I wrote last week:

Remember: the last four times the Federal Reserve has started raising interest rates, it has had no clue where the economic vulnerabilities lie:

  • In 2005-2007, neither Greenspan nor Bernanke had any idea how fragile mis- and un-regulation had left housing finance and the New York money-center universal banks.

  • In 1993-1994, Alan Greenspan had no clue how much of an impact what he saw as small policy moves would have on long-run financing terms–but fortunately he shifted policy and stopped raising interest rates in midstream (over the protests of many on his committee).

  • In 1988-1990, Alan Greenspan had no clue how much of an impact it would have on the balance sheets of southwestern S&Ls. The federal government had to give three months of total Texas state income to Texas S&Ls and their depositors who had been chasing high yields in order to clean that up.

  • In 1979-1982, Paul Volcker did not realize that raising interest rates would bankrupt not only Latin America but also leave Citibank and others as zombies–things that were bankrupt, and that ought to have been shut down, but that were allowed, via promises of government rescue if necessary, to earn their way out of bankruptcy over the next five years.

In fact, it’s not four for four over the past forty years, it’s five for five over the past fifty years–if you count the early-1970s episode of which the Penn Central financial-engineering bankruptcy was the most prominent feature, the one that would have bankrupted Goldman Sachs if not for regulatory forbearance, as one.

Economists in general–including me: in 2003-2007 I was looking at the trade deficit, global imbalances, and the dollar as the likely source of the potential next major financial crisis; not at subprime, derivatives, and attempted regulatory arbitrage by large money-center universal banks–and the people in the Eccles and Martin buildings in particular are bad at understanding how and where the financial system is fragile and vulnerable. This should come as no surprise. Economists looking at the financial-monetary system with an eye toward guarding against systemic risk are part of the same intellectual community as those advising bankers and financiers about potential major tail risks. If that community sees a major tail risk, then their principals among the bankers and financiers–people who very much want not to lose all their chips in a month and have to stop playing the game–will take steps to guard against that particular tail risk, and it will cease to be. Thus it is overwhelmingly likely that a major tail risk in finance that hits the economy in a big way will be one that has been grossly understressed and underestimated in the briefings held in the Eccles Building.

Let us take a saying of the justly maligned Donald Rumsfeld–a saying that he ought to have paid attention to, and did not–and twist it to our purposes: there is one thing we know for certain about financial vulnerabilities and risks of financial crisis: there are major unknown unknowns out there. The Federal Reserve does not know what they are. And I see no signs that the Federal Reserve even knows that there are major unknown unknowns about which it does not know.

Thus I cannot see a plausible benefit-cost analysis that leads to any rational decision to raise interest rates absent forecasts that show either significant current or the high likelihood of rapid emergence of unwanted inflationary pressures.

Yet the Federal Reserve is going to move. And it is going to start its move, with high probability, before the end of this year.

Summers asks “why?”:

Why, then, do so many believe that a rate increase is necessary? I doubt that, if rates were now 4 per cent, there would be much pressure to raise them…

His answer is that the dominant current of thought in the Eccles Building is more-or-less thus: capacity utilization is no longer extraordinarily low, unemployment is no longer extraordinarily high, the economy is no longer extraordinarily not-normal, therefore interest rates ought to be not far from normal too. As he puts it:

That pressure comes from a sense that the economy has substantially normalised during six years of recovery, and so the extraordinary stimulus of zero interest rates should be withdrawn. There has been much talk of ‘headwinds’ that require low interest rates now but this will abate before long, allowing for normal growth and normal interest rates…

But I would say that the economy is still extraordinarily not-normal along at least six dimensions:

  1. The equity return premium has reverted to its immediate post-Great Depression generation 7%/year or so, reflecting a very not-normal failure on the part of financial markets to mobilize any appreciable part of society’s risk-bearing capacity.

  2. Fiscal policy in the U.S. and even more so in the rest of the North Atlantic remains extraordinarily contractionary, in levels of spending if not in rates of change.

  3. The future regulatory structure of housing finance in the U.S. remains extraordinarily unsettled, leaving only risk-loving banks with any incentive to extend themselves to finance a return to what we used to see as normal levels of housing construction.

  4. Falling population growth and difficulty in finding large-scale private investments have diminished private demand for investment capital.

  5. And the rise of both the rich of emerging markets seeking safety for the wealth of their dynasties and of emerging market governments seeking guarantees of policy autonomy has created Ben Bernanke’s global savings glut.

  6. The unemployment rate has nearly normalized; the employment-population ratio has not.

With all six of these extraordinary non-normalities still on the table, why should the fact that the unemployment rate and capacity utilization are no longer extraordinarily non-normal lead to any presumption that interest rates ought to be near-normal as well?

As Summers puts it:

Whatever merit this view [that near-normal capacity utilization and unemployment call for near-normal interest rates] had a few years ago, it is much less plausible as we approach the seventh anniversary of the collapse of Lehman Brothers. It is no longer easy to think of economic conditions that can plausibly be seen as temporary headwinds. Fiscal drag is over. Banks are well capitalised. Corporations are flush with cash. Household balance sheets are substantially repaired. Much more plausible is the view that… the global economy has difficulty generating demand… the ‘secular stagnation’ diagnosis, or the very similar… Ben Bernanke[‘s]… ‘savings glut’…. This is why long term bond markets are telling us that real interest rates are expected to be close to zero in the industrialised world over the next decade.

New conditions require new policies… promot[ing] public and private investment so as to raise the level of real interest rates consistent with full employment. Unless these new policies are implemented, inflation sharply accelerates, or euphoria in markets breaks out, there is no case for the Fed to adjust policy interest rates.

Now Janet Yellen and Stanley Fischer at the head of the Federal Reserve see exactly what Larry Summers sees, and think all in all very much as Larry Summers does. Janet would, I think, probably say that she never had a better student in her classes than Larry Summers. (Stan might say that he might be able to think of a very, very few.) So why have they reached a different conclusion than he has?

And here I must stop. This is something that is mysterious to me.

I do note that this is an especially urgent question because of the following. Several years ago there was a very widespread perception–and, as my friend Larry Summers’s chief internet apologist during the public discussion of whether Barack Obama should nominate him or Janet Yellen to chair the Fed, I know how widespread this perception was–that Larry Summers was more conservative than Janet Yellen. Yet now she now appears much less averse to raising interest rates than he.

Must-Read: Lawrence Summers: The Fed Looks Set to Make a Dangerous Mistake

Must-Read: Let me note, in agreement with Summers, that, all four times in the past forty years that the Federal Reserve has embarked on a significant tightening cycle, the tightening has revealed significant and dangerous previously-underappreciated financial vulnerabilities.

Given the widespread perception several years ago–and as my friend Larry Summers’s chief internet apologist during the public discussion of whether Barack Obama should nominate him or Janet Yellen to chair the Fed, I know how widespread this perception was–that Larry Summers was more conservative than Janet Yellen, why she now appears much less averse to raising interest rates than he is is something that I find very interesting to note…

Lawrence Summers: The Fed Looks Set to Make a Dangerous Mistake: “The Federal Reserve’s September meeting [might] see US interest rates go up…

…[and] barring major unforeseen… will probably be increased by the end of the year…. Raising rates in the near future would be a serious error…. [It would] risk… inflation… lower than [the Fed’s target]. More than half the components of the consumer price index have declined in the past six months…. Market-based measures of expectations suggest… the next 10 years[‘] inflation will be well under 2 per cent…. Tightening policy will adversely affect employment levels…. At a time of rising inequality… tight labour markets… [are] the best social programme for disadvantaged workers…. There may have been a financial stability case for raising rates six or nine months ago…. That debate is now moot. With credit becoming more expensive, the outlook for the Chinese economy clouded at best, emerging markets submerging, the US stock market in a correction, widespread concerns about liquidity, and expected volatility having increased at a near-record rate, markets are themselves dampening any euphoria…. [Instead] raising rates risks tipping some part of the financial system into crisis….

Why, then, do so many believe that a rate increase is necessary?…. If rates were now 4%, there would [not] be much pressure to raise them…. Pressure comes from a sense that the economy has substantially normalised… and so the extraordinary stimulus of zero interest rates should be withdrawn…. Whatever merit this view had a few years ago, it is much less plausible as we approach the seventh anniversary of the collapse of Lehman Brothers. It is no longer easy to think of economic conditions that can plausibly be seen as temporary headwinds. Fiscal drag is over. Banks are well capitalised. Corporations are flush with cash. Household balance sheets are substantially repaired…. More plausible is the view that… the global economy has difficulty generating demand for all that can be produced. This is the ‘secular stagnation’ diagnosis, or the very similar idea that Ben Bernanke, former Fed chairman, has urged of a ‘savings glut’…. New conditions require new policies… steps to promote public and private investment so as to raise the level of real interest rates consistent with full employment. Unless these new policies are implemented, inflation sharply accelerates, or euphoria in markets breaks out, there is no case for the Fed to adjust policy interest rates.

Must-Read: Paul Krugman: Nobody Could Have Predicted, Interest Rates Edition

Must-Read: Paul Krugman: Nobody Could Have Predicted, Interest Rates Edition: “I did see… people praising remarks from Charlie Munger…

…declaring himself ‘flabbergasted’ by low interest rates, with a sideswipe at anyone who claims to have had some inkling:

I think everybody’s been surprised by it, including all the people who are in the economics profession who kind of pretend they knew it all along. But I think practically everybody was flabbergasted. I was flabbergasted when they went low; when they went negative in Europe–I’m really flabbergasted.

Well, negative rates were a big shock; I had thought they were ruled out by the possibility of holding cash, and hadn’t thought the mechanics through. But this kind of ‘nobody saw it coming’ remark is, if you ask me, a big dodge…. There were different degrees of wrongness here. Read that WSJ piece, or anything just about everyone on the ‘Eek! Deficits!’ side was saying, and compare it with, say, what I had to say. One reveals a world-view that has been utterly refuted by events; the other looks pretty good in the light of experience. Pretending that everyone was equally flummoxed may make those who really were clueless feel better, but it’s not the truth.

Must-Read: Stan Collender: Paul Krugman Is Wrong

Must-Read: I remember back in 1993 Alan Blinder saying at Clinton administration meetings that it was very important to look at the government’s capital account as a whole–that if we did not work hard to educate people to know that cutting government capital spending was not a net debt-reducing measure in any real sense, we would someday be sorry.

He was right. We didn’t. We are.

Sorry, Alan:

Stan Collender: Paul Krugman Is Wrong: “Krugman doesn’t get to the real problem…

…it’s not that the scolds and naysayers don’t understand the economics of government borrowing, it’s that the facts don’t matter to them. In today’s political environment, channeling Alexander Hamilton by explaining the financial realities of borrowing won’t convince many people that it’s not the Greece-like catastrophe-waiting-to-happen they continually say it soon will be. That’s why it hasn’t made any difference that the promised, right-around-the-corner federal debt-induced economic disaster hasn’t occurred…. It’s also why the scare tactics about leaving future generations with a worse economic situation has only ever dealt with half the balance sheet… [and] ignored the benefits the borrowing makes possible and the better, longer, more productive and safer life created for our children and grandchildren by, for example, advances in medical research, infrastructure, education and defense…