Courtesy of Mish.
I have an advanced copy of Stockman’s book, “The Great Deformation” but have not had time to review the book because of my conference. I hope to get to the book next week, but it is an amazingly long 712 pages.
In reference to an op-ed piece by Stockman in the New York Times: Corruption of Capitalism in America, Krugman dismissed the ex-congressman as a “cranky old man” without even reading the book.
Actually, I was disappointed in Stockman’s piece. I thought there would be some kind of real argument, some presentation, however tendentious, of evidence. Instead it’s just a series of gee-whiz, context- and model-free numbers embedded in a rant — and not even an interesting rant. It’s cranky old man stuff, the kind of thing you get from people who read Investors Business Daily, listen to Rush Limbaugh, and maybe, if they’re unusually teched up, get investment advice from Zero Hedge. Sad.
Stockman Fires Back
Today MarketWatch reports Stockman Fires Back at Krugman, Critics. Here is an excerpt of the interview….
MarketWatch: Since Nixon’s “abomination” as you call it, we have had some periods where government spending to GDP actually went down, like during the Clinton era. Doesn’t that show it’s just the choices made by Congress rather than the Fed to blame [for rising debt]?
Stockman: There is the issue that Congress ultimately is the fiscal authority. But my argument is, when the Fed becomes a massive buyer of bonds and debt and artificially suppresses interest rate below market-clearing levels, it’s a terrible signal to the Congress that debt is cheap, that running deficits is a viable strategy. So therefore they are induced to kick the can, to let it drift and avoid hard choices. Who wants to tell the public you are going to take your broccoli of higher taxes and lower benefits and spending if you can issue debt on a three-year basis for 40 basis points. That’s free. I was in Congress, they don’t do decimal math, OK? And they think the money is free, it’s a bad problem philosophically, we shouldn’t be doing this for the great long run, but it’s no harm today.
Then they have professors like Krugman who give them the disingenuous advice that the bond vigilantes don’t care. The market is saying, “fine with us, we don’t care, keep piling the debt on, we love it.” That is so much baloney. The reason the interest rate on the 10-year bond 10_YEAR -0.33% today is 1.8% or whatever it happened to settle today, is the market knows the Fed is buying half of the debt and is front running the Fed. And it is renting the bond on repo, 98 cents on the dollar, based on overnight money that’s free thanks to Bubbles Ben as well.
For a so-called Nobel laureate to claim the vigilantes are validating this crazy deficit expansion through the fact the interest rate is 1.8% is the height of disingenuous.
MarketWatch: But Bernanke did a recent speech on this, and he pointed out the bond yields of every industrialized nation, including Germany, have dropped.
Stockman: You know why? Because every central bank in the world is putting out the same heroin, the same monetary policy poison. Because the Fed is doing this, and this is part of my theme in the book, that once we started going into the massive balance sheet expansion, other central banks had to reciprocate or otherwise their currencies would be disadvantaged.
The whole world of central banks is now administering the same bad medicine. To say it works because everyone is doing the same thing, again, I think is utterly disingenuous.
Nixon’s Abomination Explained
Wikipedia refers to “abomination” as “Nixon Shock“.
“The Nixon Shock was a series of economic measures taken by United States President Richard Nixon in 1971 including unilaterally canceling the direct convertibility of the United States dollar to gold. It helped end the existing Bretton Woods system of international financial exchange, ushering in the era of freely floating currencies that remains to the present day.”
I side with Stockman. Krugman is disingenuous, and closing the gold window was an abomination.
Deposit Insurance a Moral Hazard
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