Saturday, May 30, 2009

I Sure Hope This Debate Continues!

Niall Ferguson fires a shot across the bow, after some previous minor skirmishes with Krugman.
This is entertaining at least, and matters, as I am trying to enjoy life as a sort of rentier. And so I prefer Krugman's mantra!

Of course, Mr Krugman knew what I meant. “The only thing that might drive up interest rates,” he acknowledged during our debate, “is that people may grow dubious about the financial solvency of governments.” Might? May? The fact is that people – not least the Chinese government – are already distinctly dubious. They understand that US fiscal policy implies big purchases of government bonds by the Fed this year, since neither foreign nor private domestic purchases will suffice to fund the deficit. This policy is known as printing money and it is what many governments tried in the 1970s, with inflationary consequences you do not need to be a historian to recall.
No doubt there are powerful deflationary headwinds blowing in the other direction today. There is surplus capacity in world manufacturing. But the price of key commodities has surged since February. Monetary expansion in the US, where M2 is growing at an annual rate of 9 per cent, well above its post-1960 average, seems likely to lead to inflation if not this year, then next. In the words of the Chinese central bank’s latest quarterly report: “A policy mistake ... may bring inflation risks to the whole world.”

A small consolation is that I am rentier in Canada, where commodity prices tend to drive the economy. My fingers are crossed, but I will keep reading these guys!


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