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Krugman Vs. Feldstein on Interest Rates and the Fed
Be prepared for the next great transfer of wealth. Buy physical silver and storable food.
brucekrasting.com / By Bruce Krasting / April 3, 2013
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.
Thanks to BrotherJohnF
2013-04-03 19:32:20
Source: http://silveristhenew.com/2013/04/03/krugman-vs-feldstein-on-interest-rates-and-the-fed-2/
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