Sunday, December 23, 2012

Politcs vs. Economics and the "Fiscal Cliff"

Paul Krugman hopes that the President doesn't believe in "invisible bond vigilantes",
But here’s a passage that bothered me:
On Dec. 13, Mr. Boehner went to the White House at the president’s request, joking he was going to the woodshed.

The president told him he could choose one of two doors. The first represented a big deal. If Mr. Boehner chose it, the president said, the country and financial markets would cheer. Door No. 2 represented a spike in interest rates and a global recession.
Oh, dear — does the president still believe that failure to reach a Grand Bargain will cause an attack by the invisible bond vigilantes, and that this is the reason we should fear the fiscal cliff?
Here's the thing: Thanks to the Republican Party's inability to get its act together - it's a lot easy to be unified when your entire approach to policy is obstructionism than when you actually have to make viable policy proposals - we're going over the cliff.

What the President is doing is hanging the responsibility for any economic fallout around the neck of the Republican Party.

Also, let's not forget that we have real (government) bond vigilantes - rating agencies with a history of blessing any piece of garbage they're paid to rent as "AAA", who could potentially try to re-establish their reputations by downgrading treasuries. Will that affect interest rates or the ability of the country to sell its debt? Probably not. Call them, "The bond vigilantes who can't shoot straight."

If the quote is accurate, the rhetoric seems somewhat telling. If we see a global recession, we're not likely to see a spike in interest rates. And as Krugman has argued for a long time, a spike in interest rates is not something we're likely to see in isolation. So really, it sounds like "These are the worst two things that could happen and, should they happen, I'm going to blame you. And should other bad things happen or should the economy continue to struggle, I'm going to take credit for my policies preventing the global recession and interest rate spike that the people already expect to result from going over the 'fiscal cliff'."

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