Man Without Qualities

Wednesday, March 12, 2003

Krugmania Explained!

Prompted by Mickey Kaus' puzzlement at the most recent Krugmania efflorescence, Brad DeLong accomplishes the seemingly impossible task of scribing a post simultaneously stilted, acrobatic, and hilarious. All that in the service of "explaining" Paul Krugman's bizarre concern that the Administration is plunging the nation into both deflation and inflation. Ah, yes.

The Good Professor intones:

Mickey Kaus is puzzled because he doesn't get the fact that that the two different problems that worry Krugman (and me!) operate at different time scales. One--possible deflation--is a problem for the next three years. The second--possible inflation--is a problem that may begin to threaten the country starting at the soonest a decade hence, but not until then.

Poor Mickey - he just "doesn't get" it. Now, one should also keep in mind that the Good Professor is writing to explain a column by Herr Doktorprofessor revolving around his just having refinanced his mortgage to lock in a new low fixed interest rate (but a rate higher than his old variable rate mortgage). That is, the Good Professor is "explaining" that Herr Doktorprofessor rushed right down to his mortgage broker to lock in a rate rather than risk exposure to a long-term interest rate surge triggered by expectations of an inflation that may (or may not) happen, in the Good Professor DeLong's words, "starting at the soonest a decade hence, but not until then." Yes, indeed, Paul Krugman is just terrified that the financial markets might "wake up" to his neurotic fear (shared by Professor DeLong!) that federal governments ten years out will start to act like the guys who run Argentina! Not just an academic concern, mind you, but a terrifying fear that prompts a mortgage refinancing. One needs a lot of academics in one's head to come up with those particular fears and explanations.

But, contrary to Good Professor DeLong's "explanation," Herr Doktorprofessor Krugman makes it pretty clear that he expects the surge in long-term interest rates triggered by expectations of future inflation to commence within a matter of months, maybe even TOMORROW: It means higher monthly payments, but I'm terrified about what will happen to interest rates once financial markets wake up to the implications of skyrocketing budget deficits. .... With the economy stalling and the stock market plunging, short-term rates are probably headed down, not up, in the next few months, and mortgage rates may not have hit bottom yet. But unless we slide into Japanese-style deflation [Note to Prof. DeLong: Is this "less-than-3-year deflation" or full "Japanese style 10-year-plus deflation" that Prof. Krugman thinks we may "slide into?" Is the point that the demand for long term credit may drop so low that even fears of long term inflation won't drive up the price (interest rate) of such credit?], there are much higher interest rates in our future. ... I've done the math, and reached my own conclusions — and I've locked in my rate. And let's not forget that this is the same Herr Doktorprofessor Krugman who uses the term "no relief is in sight" to describe relief that will likely occur within a year or so. [And even with that grudging acknowledgement that mortgage rates may not have hit bottom, this has got to hurt.]

Also, Herr Doktorprofessor Krugman's old, variable interest-rate mortage would have been keyed to short term rates - which do not reflect market concerns about inflation beginning far in the future, although short-term rates do increase when inflation actually increases or the market fears an uptick in inflation in the near term. But the Good Professor explains that none of those things that affect short term rates will happen for at least ten years, So if that old Herr Doktorprofessor mortage hadn't been paid off, it's interest rate would have stayed low for at least 10 years. If Herr Doktorprofessor is right and the "market wakes up" to the risk of future inflation, then long term rates will rise. But - assuming Herr Doktorprofessor is right and the market keeps proving that he is right for the next ten years - is it not likely that in the face of ten years of destructively high long term interest rates the federal government would itself wake up and do something about them, such as cutting federal spending or reducing regulatory drag? But Herr Doktorprofessor Krugman would rather contract to pay a higher interest rate for 10 years than bet that the United States would fix a severe long-term interest rate problem in that period. All because he's done the math. I wonder if he'll share what math it is that one "does" to determine by algebra that the federal government will likely become disfunctional for more than 10 years.

With friends like the Good Professor to "explain" his writing, why would Herr Doktorprofessor Krugman need critics like the Krugman Truth Squad and various Krugman Watchers to humiliate him? On the other hand, the rest of us can be thankful that Don Luskin does such a good and gleeful job of it. And Paul Jaminet of Brothers Judd points out that the Krugman/Delong approach gives a new meaning to the term "excluded middle."

UPDATE: Tom Maguire reminds me by e-mail that Herr Doktorprofessor Krugman has also recently been terrified about the bursting of a possible real estate bubble! I just want to go on record that it is my firm conviction that unless we slide into Japanese-style real estate deflation, there are much higher real estate prices in our future! There. Surely that cleared things up.

In the mean time, should a man (excuse me, not just a man, a full Princeton economics professor and John Bates Clark medal winner) who just gave up ten years of cheap variable-rate mortgage payments to guard against possible inflationary federal acts at the end of that period seriously think about what he needs to do to avoid the fallout from the bursting of that real estate bubble? Say, by moving onto a boat right away?

Do the math, Herr Doktorprofessor - and lock in your slip fees!

MORE:The ceaseless extrusion of economic/political agitprop has begun to bore the great mind of Herr Doktorprofessor and he has recently begun to spice things up by flinging racial slurs, as Jim Miller points out. Yes, yes, this particular piece of Krugmania is beneath contempt, but reading the column and Jim's take down is a guilty pleasure. If it's not quite up there with back-to-back Buffy reruns, it's certainly on par with filling the celery groove with peanut butter and chowing down!


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