In his op-ed in the Wall Street Journal, Ronald McKinnon bemoans the the absence of the bond vigilantes who, during the Clinton administration “served to discipline government spending.”
His opinion is not one that I share. However much downward pressure on discretionary government spending the vigilantes might exert would, in my view, be offset by an increase in interest expense on the government’s debt.
What I do share is McKinnon’s assessment of the economic damage caused by the Fed’s policy of “ultra-low interest rates”:
When interest rates dipped in the past, at least part of their immediate expansionary impact came from the belief that interest rates would bounce back to normal levels in the future. Firms would rush to avail themselves of cheap credit before it disappeared. However, if interest rates are expected to stay low indefinitely, this short-term expansionary effect is weakened.
This is exactly the point I made in “My Solution to the Economic Crisis.”
Chris says:
They might be with the WSJ guy who was predicting runaway inflation based on his assessments of the bond market a few months ago. Have we checked in BS Alley?
September 30, 2011, 5:55 pm