Afternoon Must-Read: Paul Krugman: The Pimco Perplex

Paul Krugman: The Pimco Perplex: “Why was Gross betting so heavily against Treasuries?…

…Brad DeLong tries to rationalize Gross’s behavior in terms of a coherent story about an impending U.S. recovery…. But Gross wasn’t saying anything like that. Instead, he… warned that the impending spike in rates when QE2 ended would derail recovery. So why did he believe all that?… Since 2008 the basic logic of the economic situation has been that the private sector is trying to run a huge surplus, and the public sector isn’t willing to run a corresponding deficit…. A lot of people… have just refused to accept this account…. You might think the failure of higher rates to materialize… would cause them to reassess…. The big excuse was that rates would have gone higher if only the Fed weren’t buying up the stuff…. You can see why I found Gillian Tett’s apologia for Gross–that he was blindsided by central bank intervention–frustrating. For one thing, that’s accepting a model that has failed with flying colors; but beyond that, Gross’s really bad call was almost exactly the opposite, his claim that rates would soar when the Fed’s intervention ended…. Finance people seem weirdly determined to believe in a macro canon whose hold on their perceptions appears to be completely unbreakable, no matter how much money it causes them to lose.