Must-Read: : Confidence as a Political Device: “The leap from the statement that ‘in some circumstances confidence matters’…
…to ‘we should worry about bond market confidence in an economy with its own central bank in the middle of a depression’ is a huge one…. For the US and UK in 2009, was there the slightest chance that either government wanted to default?… The answer has to be a categorical no…. The argument goes that if the market suddenly gets spooked and stops buying debt, printing money will cause inflation, and in those circumstances the government might choose to default. But we were in the midst of the biggest recession since the 1930s. Any money creation would have had no immediate impact on inflation…. The Corsetti and Dedola paper is not applicable. (Robert [Waldmann] makes a similar point about the Blanchard paper. I will not deal with the exchange rate collapse idea because Paul already has….
Ah, but what if the market remains spooked for so long that eventually inflation rises?… In Corsetti and Dedola agents are rational, so we have left that paper way behind. We have entered, I’m afraid, the land of pure make believe. So there is no applicable model that could justify the confidence effects that might have made us cautious in 2009 about issuing more debt. There are models about an acute shortage of safe assets on the other hand, which seem to be ignored by those arguing against fiscal stimulus…. When people invoke the idea of confidence… it frequently allows those who represent the group whose confidence is being invoked to further their own self interest…. Bond market economists never saw a fiscal consolidation they did not like…. If the economics point towards a conclusion, and people argue against it based on ‘confidence’, you should be very, very suspicious…