Tuesday, August 18, 2009

Another non-problem of the federal deficit

Paul Krugman (Nick Beaudrot explains it all 08/17/09) has a good brief reminder about how superficial and wrong the deficit scolds can be, in this case in particular on the idea that high deficits drive up interest rates:

On reflection, it’s obvious why: a weak economy both drives up deficits and drives down the demand for funds, while a strong economy does the reverse. Thus the surpluses of the late Clinton years were associated with high interest rates, while the current recession has depressed both rates and revenues.

And what about the bounce in interest rates over the past few months? It reflects a gradual reduction in the end-of-the-world discount: interest rates have risen along with stock prices as investors have gradually become convinced that we’re avoiding a second Great Depression.
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