Wednesday, April 3, 2013

Krugman Vs. Feldstein on Interest Rates and the Fed


Paul Krugman has been taken shots at Martin Feldstein over this article (Link). Feldstein made the case that the Fed is keeping  interest rates artificially low – and sooner or later this will cause a problem.  The issue is whether the Fed is creating a new bubble. Feldstein says, “Yes”. Krugman says “N0″. A few lines from PK on this topic:


I really don’t understand how Marty Feldstein can look at these facts and conclude that the only way to explain low interest rates is to imagine that the Fed is imposing massive market distortions.


(Feldstein) then grabs hold of an answer to his imagined puzzle — it must be the quantitative easing! — that assigns vastly more importance to Fed bond purchases than I think can be justified by any evidence I see.


The notion that rates are low only because the Fed is holding them down by “gobbling” up debt is clearly refuted by international evidence, clearly refuted by the behavior of rates over time, and logically flawed.


This is a very important debate. Either Krugman is right, or Feldstein is. IMHO Krugman is ignoring the laws of supply and demand, and also the laws of gravity. The Fed’s ZIRP policy anchors the short end of the curve at 2% below the rate of inflation. The long end of the curve is a function of the base cost of money, adjusted for supply from Treasury of new paper, and the demand that the Fed is creating with $85b a month of POMO.

If Feldstein can’t convince Krugman, I doubt my thoughts will either. But I’ll try.


Krugman provided a chart in this post (Link) that he maintains  proves his point – QE has little consequence on the shape and level of the yield curve. PK’s comments and the chart:


You can see a couple of pauses in the Fed’s expansion of its holdings — and no relationship at all to rates.





A different way to track the relationship between the Fed’s balance sheet and interest rates comes from the folks at BMO Capital. Read the full report here. The author, Dimitri Delis, looks at the Fed’s POMO buys (QE) under a different light than PK. BMO measures the Fed’s purchases based on the 10-year equivalent duration (If the Fed buys 3 year bonds it has less “consequence” than an equal $ amount of 30-year bonds) and looks at real interest rates as opposed to PK’s nominal. Delis concludes that the relationship between QE and real interests rates line up nearly perfectly (.94 correlation).





Krugman compared apples to oranges to make his point. BMO’s look of the same data, makes an apples to apples comparison, and comes to a different conclusion.

So Mr. K, whatdaya think of those apples?





  1. Is it not correct to say that if the FED raised interest rates a 1/2 % it would explode the deficits and all of it would go up in smoke? If you think no one is borrowing now what will happen then? Also who cares what interest rates are. If ican borrow at 10% let’s say but know tha tI can make 20% somewhere else who cares? Interest Rates are meaningless in that respect. So I think the the main reason is purely not to bankrupt the Govt any sooner than they have to. All the while the big investment houses front run all the dopes who continue to buy the crap paper. Have you heard about Russia & China making a deal backed by the same bonds? This was all agreed upon while Cyprus was being looted. Checkmate!

  2. But What Do I Know? says:

    Low interest rates will cause a problem, but not the one Mr. Feldman thinks. ZIRP plus aging demographics causes deflation because the loss of cash flow from investments outweighs the benefits of lower debt payments.

    Japan has had ZIRP and deflation together for quite some time now, and yet no one seems to believe that the one is related to the other. . .

    • There is no deflation in Japan, and no deflation in the US either. US CPI has been positive each and every month since 2007, except for ONE MONTH. One month is not evidence of deflation — no matter how much bullshit lying that idiot Bernanke does. The US has had minimum 1.5% inflation every year since the Fed’s credit bubble popped, according to the government’s own statistics.

      Deflation is a lie.

      A recession? Yes. An economic depression? perhaps. (note that depression is not the same as deflation, even though CNBC talking heads often confuse the two).

      Both the US and Japan suffer from stagflation — where nominal economic growth is “positive”, but the cost of living increases by even more than the alleged growth.

      In the 1970s, incompetent Fed Chairmen pretended to fight stagflation with artificially low rates… The economy went nowhere — just like today. Drugs and crime were growing problems — just like today. Political corruption was the norm, in Washington DC, states and local governments — just like today. The only people who “won” in the stagflation environment were government employees — just like today.

      Japan is now well into its third lost decade — 25 years and still counting. Decades of artificially low rates. Decades of “stimulus” spending that almost exclusively benefited political cronies. Decades of debt that the deadbeat cowards in government plan to stick future generations with. There is absolutely no hope for Japan’s children.

      Krugman has never built an economy or a company. The loser helped grow Princeton’s tuition rate three times faster than inflation — a crime made possible by (you guessed it) MORE DEBT. The bubble in student debt is the result of Krugman’s crimes… why would any reputable person even give Krugman the time of day? The man is a fool.

      Bernanke is mercifully gone next January — and good riddance to the loser. Those of us that employ young people should remember that Princeton’s economic department was run by Bernanke and Krugman — I won’t even interview Princeton grads. Anyone dumb enough to sit through those lectures is not smart enough to work in the real world.

      F U Bernanke!!!

  3. Conscience of a Conservative says:

    Any long term interest rate implies shorter term forward rates( example from the one year and the three year you an imply a two year forward). As the Fed has floored money market rates and buys securities elsewhere on the curve, it effectively does control rates across the whole spectrum. To say the Fed is not controlling rates, ignores the very activities it engages in. If Krugman and others believed the Fed’s actions were not responsible, then it shouldn’t matter if the Fed were to end it’s purchases and allow short term rates to rise.

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  6. Krugman won;t think anything of these apples, coz he’s just a government shill.
    The government say “print money to get me relelected” and krugman says “let me tell everyone how this is sensible economics – and if anyone disagrees I’ll have a tantrum”.

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  8. Krugman may be half-right, in a way. But it’s not just the Fed that has been responsible for those falling rates as far back as 2007..or 1997…or 1987. I would say, speaking very generally, that rates have been in a 30-year decline since the Volker rates of the early 80s.

    Too much money has been engaged in unproductive yield-chasing for too long. Why? A dearth of opportunities for REAL productive investment in wealth-generating enterprise. But lots of financial paper games. Not only the Fed rate manipulation…also unsustainably high labour costs, “minimum wages”, the explosion of expensive healthcare mandates paid by employers, regulation stranglehold, a climate of rampant threats of litigation, rising taxes and fees, social welfare spending, government deficits – and many, many more.

    Would YOU choose the U.S. as a place in which to set up a GOODS-PRODUCING investment??

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