Policy Implications of Capital-Biased Technology: Opening Remarks by Krugman

Actually, something like that is already happening, although it’s mostly coming from rising inequality of earned income. Remember, back in the 1980s the Greenspan Commission supposedly fixed Social Security’s finances for 75 years, that is, until 2060. Why, then, do most projections show the trust fund running out well before then? Not because life expectancy is rising — that was already built into the projections. No, the big reason is rising inequality, which has led to a growing share of income coming above the payroll tax cap, so that SS revenue lags behind overall compensation. And yet the conventional wisdom is that we should respond to a financing issue caused by rising inequality by slashing benefits, further increasing inequality. 

We should keep this line of argument in mind — and when somebody talks about the need to rein in entitlements, we should always ask whose interests, exactly, are being served.

And the Fed has consistently fallen short in its predictions of economic growth and the strength of the recovery.

Currency Wars Aren't Zero Sum by Yglesias

Very interesting column by Floyd Norris:

Reading Pessimism in the Market for Bonds

Michael Gavin, the head of United States asset allocation for Barclays, pointed out this month that over the past 30 years an investor who stayed invested in American, or British, 10-year government bonds would have earned more than 5 percent a year over inflation. 

“It does not require advanced market math to understand that returns like these are no longer remotely plausible,” he wrote. “But they say that fish don’t know that they live in water — until they are removed from it — and we wonder if some of the many market participants whose entire professional experience has been conditioned by the financial backdrop created by the bond market rally might underestimate some consequences of its termination.” 

Even if rates stay where they are for the next five years, and investors collect the interest coupons, he said, “bonds will be transformed from wealth creators into wealth destroyers.” 

Or at least they will be unless there is severe deflation. For that is the only situation that will allow today’s new long-term bonds to turn into good investments. 

Is that possible? To think it is likely, you pretty much have to assume that economic growth is a thing of the past in both the United States and Europe. It is not an optimistic outlook. 

James Grant, the editor of Grant’s Interest Rate Observer — and a bear on bonds for some time — argues there are parallels between 1981 and now, at least in conventional wisdom. 

“Central banks are harmless, said the bond bears in 1981; in a social democracy, inflation is ineradicable,” he writes in the current issue of his publication. “Central bankers are harmless, charge the bond bulls of 2012; in an overleveraged economy, inflation is unachievable.” 

One reason bond yields are so low now — at least in markets like Britain and the United States — is the fact that after the Greek fiasco investors have come to fear default more than currency depreciation. That had led to a rush to default-proof bonds, which means bonds issued by countries that can print the currency they borrowed. (It may be that Treasuries will not always be default-proof because a Tea Party-influenced Congress will refuse to allow the government to pay its bills. But so far markets assume the politicians will not be that stupid.) 

It is interesting to look at the relationship of stocks and bonds when the bond market is near extremes in valuation. Those moments tend to come when economic uncertainty is high and fears are widespread. In the past, such fears have proved to be wrong. 

In 1946, there was a consensus among many economists that a new depression was likely. After all, the 1930s depression did not end until armies put unemployed people to work. Now that the war was over and armies were shrinking, would not the economy retreat again? 

Bond prices turned down — and yields up — in the spring of 1946. Stocks sold off that fall, and it was not until 1950 that the stock market got back to where it was when the bond bear market began.