KRUGMAN: "Aaauuuggghhh!"

[kpete]

August 8, 2011, 11:08 AM
Aaauuuggghhh! Market Commentary Edition

......................

Once again: S&P declared that US debt is no longer a safe investment; yet investors are piling into US debt, not out of it, driving the 10-year interest rate below 2.4%. This amounts to a massive market rejection of S&P’s concerns.

The “signature” of debt concerns should be stock and bond prices both falling; what we actually see is those prices moving in opposite directions. And that’s normally the signature of concerns about a weak economy and deflation risk (see Japan, decline of).

What triggered economy fears? To some extent I think this is a Wile E. Coyote moment, with investors suddenly noticing just how weak the fundamentals are. Also, the mess in Europe.

http://krugman.blogs.nytimes.com/2011/08/08/aaauuuggghh...

[nomb]

1. Krugman has "Jumped the Shark".

"Once again: S&P declared that US debt is no longer a safe investment; yet investors are piling into US debt, not out of it, driving the 10-year interest rate below 2.4%. This amounts to a massive market rejection of S&P’s concerns."

He knows better. As does anyone watching the 500+ point drop in the Dow as the market digests the S&P downgrade while money shifts from risk to being parked in cash via US Bonds.

The market as a whole is a neutral, non-political entity that moves in rational, albeit complex and counter-intuitive ways.

It can be regulated, taxed, or abolished - but Krugman telling a fib to advance a Keynesian agenda is detrimental to an informed and intelligent society.

He's creating useful idiots that will parrot him because he is still to them a trusted authority, but he's disseminating things he knows are not true and that wouldn't make it through his own classroom.

It's a disservice to his cause, his followers and society.

[bluerum]

2. So. What exactly was his fib? That I don't care about S&P's rating? (I don't)

Or that people are piling into US bonds driving the rates down?

[nomb]

3. "This amounts to a massive market rejection of S&P’s concerns." - Krugman ignores the 500 point Elep

Krugman ignores the 500 point Elephant crashing around the room in full wail.


Clearly, a massive rejection of S&P concerns is not found in the 500+ Dow drop, or the Trillions in worldwide assets moving at the speed of light in search of safety.

[Douglas Carpenter]

4. moving at the speed of light to safe havens such as U.S. Treasury bonds

[nomb]

11. Buying US Bonds was the basic Econ 101 response to the downgrade:

Read this from August 1, a full seven days ago:


http://money.usnews.com/money/personal-finance/mutual-f...


There is nothing at all earth-shattering there in that simple news piece stating that US Bonds will be sought after and bought if the S&P rating is downgraded. It was also the guaranteed result if we had defaulted a few weeks ago. Yes, if we had failed to find agreement - people would have bought US Bonds in droves.

[Douglas Carpenter]

17. and as your aticle points out:

U.S. Treasury bonds and thus U.S. debt is still viewed as about the safest haven there is. The downgrading by the S and P would tend to suggest that treasuries are now less safe than other investments. But as your article points out - the market simply doesn't agree as evidenced by the massive rush to purchase U.S. debt even at lower 10-year yields.

[Unvanguard]

20. The basic message of that article is that the downgrade doesn't actually matter.

And the US debt only matters in the long term, not the short term. Which is sort of what Paul Krugman has been saying all along.

[nomb]

22. if an influential ratings agency like Standard & Poor's were to actually downgrade the U.S. governm

"if an influential ratings agency like Standard & Poor's were to actually downgrade the U.S. government, experts say investors would seek safety, probably in the form of U.S. treasuries,"


Pretty simple.

S&P downgrade of US debt = Flight to Quality and buying of US debt.

[Unvanguard]

33. That mechanism still doesn't make any sense.

And if you read the article carefully instead of paying attention to its journalistic "counterintuitive" framing, you'll note that its actual point is that US investors will continue to see US treasury bonds as a safe asset even after a downgrade, that the only thing likely to bring about an actual increase in interest rates is long-term debt growing to a level that makes it look as if it can't be paid off.

If investors trust the S&P, they will see US treasury bonds as less safe. It follows that they will sell them, not buy them. That's not what they're doing right now.

[Vinnie From Indy]

46. Your post is a monument to ignorance. You are simply dead wrong.

I hope all DU'ers note that this poster is absolutely, completely and laughably wrong about the statement the market made today. Krugman is dead on correct as is Warren Buffet. you can read and accept this anonymous posters word or Krugman's and Buffet's. I pick the latter gentlemen.

[Viking12]

5. You are clueless. People are buying the very thing that was supposedly downgraded.

People are investing in U.S. debt, a very clear and direct refutation of S&P by the market.

[BlueCheese]

8. No.

The falling treasury yields indicate that the world thinks US treasuries are the safe haven--the very same treasuries that S&P said are a higher risk. Clearly that means people don't believe S&P's warnings.

But you're right--the fall in the stock market has to be explained. What might have caused it? Well, the stock market had a terrible week last week, too. That was mostly because of trouble in Europe and bad economic news here. Isn't it more plausible that this is simply a continuation of that, with maybe some stop-loss or margin call acceleration built in?

[Unvanguard]

9. Your argument is disingenuous.

The stock market was falling all of last week, including immediately after we got a debt agreement that averted the risk of default and committed the US government to substantial debt reduction. Why wouldn't it fall more this week, given dismal economic data? The stock market drop could be because of the S&P downgrade, but it also could primarily be due to other factors.

What would tell us something about the market effect of the S&P downgrade? The reaction of investors buying the very asset the S&P downgraded: namely, US treasury bonds. And we know what their reaction is: they're doing the same thing they were doing last week, investing in them as a safe alternative to stocks, driving the interest rate on those bonds even lower and reducing US borrowing costs. That's exactly the opposite of what we would expect if the markets took the S&P seriously.

[BlueCheese]

12. Excellent post.

I wish our journalists could be as reasoned, and stop spreading the conventional un-wisdom that this is the doing of the downgrade.

[Jakes Progress]

19. Do you not understand the difference between stocks and bonds?

Your post would indicate that you either don't know that or that you have misread the article.

[Warpy]

24. The smart money waited until the panicky types had acted

It's now down 333 points, awful but not catastrophic.

A 2000 point drop would have been catastrophe and a vote of no confidence.

That can still happen and likely will unless the inordinate power a few radicals in Congress wield is checked.

[mmonk]

7. Doubt there will be much in the answer you can gleen from.

[WilliamPitt]

18. Fail.

[EstimatedProphet]

21. Really?

The market as a whole is a neutral, non-political entity that moves in rational, albeit complex and counter-intuitive ways.

Are you quite sure about that?

[nomb]

26. Yes

The market as a whole. Do individuals manipulate, distort or abuse individual parts or pieces of the market for finite periods? Are there great fortunes stolen in this way? Most are probably.

YES. Without doubt, it is demonstrably true that there are factual, massive and ongoing abuses.

My point is that the overall market exists despite, and aloof from this. The market does not steal or abuse anymore than a city robs or kills. It's an important distinction, this recognition of the reality of its existence separate from events that are perpetrated within it.

[EstimatedProphet]

42. No

The market quite often responds to panic. It's made up of people, after all. Because of that, people can cause panics for their own ends. To say that is behaves rationally just because it exists independently from individuals is to misunderstand the word "rational".

[jwhitesj]

25. You don't like Keynesian Economics?

Would you rather take economic advice from Milton Friedman? Seriously, what's wrong with you?

[nomb]

28. Keynes is not served by, nor found within, populist falsehoods intended to stir up the mob.

A nations economic interests are not served by wasting ones political capital (and Krugman's Nobel has given him tons of that) on BS that does no one any good.

I expect serious people to be serious. I wouldn't and don't care a fig if the average talking head spews this nonsense - but I care a great deal when the Knights on the Chess table are used indiscriminately in an indefensible manner that is counter-productive to the greater good of society.

Seriously.

[jwhitesj]

32. I don't understand what your trying to say.

This is how I'm reading your post, please tell me if I understand correctly.

Keynes economics are not based on populist objectives.

Krugman has political capital and should use that political capital on addressing the issue rather than poking fun at people he disagrees with.

Do I have the jist of it correct?

[nomb]

34. No.

Krugman is a Keynesian. Krugman seeks to support and encourage Keynesian policies.

Krugman said that the market rally in US Treasury Bonds was a , quote, "massive market rejection of S&P’s concerns."

It is that statement, which he knows is untrue, that will harm his efforts to advance Keynesian economic policies by eroding his voice.

When one spends ones political capital today, one has less. Period.

I expect serious people to be serious. I care a great deal when the Knights on the Chess table are used indiscriminately in an indefensible manner that is counter-productive to the greater good of society.

[jwhitesj]

37. I think I get it now

In your first post I wasn't understanding if it was the agenda or the message that you were having a problem with.

[muriel_volestrangler]

41. See post #9

Your claim that what Krugman says is 'untrue' just doesn't hold up. Let's look at how others see it:

Treasury bond yields plunge as panicked buyers ignore S&P downgrade

US Treasury bonds shrug off downgrade

Take that, S&P! Rates on Treasuries stay low

Not only is it not 'untrue', it's a widely-held view.

[saras]

29. Best laugh I've had all month

"The market as a whole is a neutral, non-political entity that moves in rational, albeit complex and counter-intuitive ways."

The market is the desires of those with the money.

In that universe where everyone has a pony or unicorn (their choice) and all the money they want, the market will approximate, with error allowed for imperfect communication and deliberate deception, a neutral entity.

It will never be non-political until everybody wants exactly the same thing, in such a way as causes no competition for resources. (i.e. ponies and unicorns for all).

Nothing else about human behavior is rational. Science takes extraordinary training and discipline to produce something resembling rationality, but it takes generations. Why would the market magically be the single exception? There's lots of documentation on exactly how and why irrational forces affect the market, and there are a lot of them. Is it a premise of a particular economic ideology that these forces exactly and always add up to perfect rationality, like the physical forces on an object always add up?

[nomb]

30. See #26

http://www.democraticunderground.com/discuss/duboard.ph...

[JDPriestly]

35. When was the Krugman piece written?

Today after the fall of the stock market or over the weekend before the fall?

[nomb]

38. "Carnage in stock markets as I write — and all ... attribute it to S&P’s downgrade" - P. Krugman

It was written before the President spoke, DOW was down around 350ish I believe at that time.

[nadinbrzezinski]

6. Mr. Krugman I get it... you are really having a hard time

understanding this is not about our ability to pay the debt, but our WILLINGNESS to pay it. It is about a Political matter, not an economic one.

Mind you, I understand the confusion.. I truly do. It is common every time the rating agencies do this for POLITICAL reasons, and no it is not the first time... just the first time IN THE US.

[BlueCheese]

10. No.

I think the big drop is because of continued worldwide economic weakness. Falling treasury yields mean than people actually are looking to US gov't debt as a safe haven.

[nadinbrzezinski]

13. Read the comment from standards and poor, it is in black and white

serious.

And yes I will stand by what I said, Krugman is out of his element in this one. It has NEVER happened in US history that the messenger tells us we have an unstable government.

Yes it is partly due to European woes, but it is also because this.

[BlueCheese]

15. We'll have to disagree.

I think S&P are completely wrong, and I think that's what the bond market is telling us.

[nadinbrzezinski]

16. And we have a functional govenrment in DC?

Their main thrust was not about our ability to pay, but our ability to govern ourselves.

Perhaps since I have seen them (comments that is) for OTHER countries when they face downgrade for POLITICAL reasons...

[MilesColtrane]

14. At this point the continued drop has more to do with Bank of America teetering.

The drop from the (mild) downgrade was just a psychological shock and it probably would have shaken out in a couple of trading sessions.

If BoA goes under all bets are off.

[Jakes Progress]

23. At this point there are people posting on this thread

who are posting without understanding either Krugman's article or without understanding the market. Maybe both.

No one knows exactly why the market is doing what it is doing. People are trying to interpret that. Some, like Krugman, know how global economies work. Others, like some here, have pet theories based on hunch, political predilection, or what someone else said.

I'll go with the guy who has been most consistently right about the economy so far. Me, I trust neither bonds nor stocks. Maybe I'm just paranoid, but I think the rich are trying to steal my money.

[jwhitesj]

27. Yeah

I wish I could rec your post, I would if I could

[TalkingDog]

43. Welcome to DU. We usually do that by proxy with a +1

It's not a real rec, but it's the best we can do.

[mmonk]

36. There might be a chance you are right. BTW, I like to understate things sometimes.

[dawg]

31. Krugman is exactly right.

If S&P had downgraded GE Corporate Bonds, and the market rushed out to sell everything else in order to buy those very bonds, it would be a clear sign that the market was reacting to something other than S&P's opinion.

Personally, I believe the market has decided that we are too stupid a country to make prudent decisions, and that we will pass further austerity measures driving our economy into a double-dip.

[Uncle Joe]

39. I believe these major investors are just pissed at

U.S. Representative Cantor for shorting treasuries and then using his leadership position and power as a United States Congressman to undermine the perceived good faith of the U.S. government, they recognize a traitor when they see one and now they're going to make him pay for it.

Thanks for the thread, kpete.

[nomb]

40. You want counter-intuitive? Here:

If things get super bad ... US Bonds will go to zero percent interest.


Why?
Because as people dump out of all risk they flow to cash. Bonds are cash+.


What does that mean?
It means that because we can, and will, always in the end print the paper if we need to to pay off our debt...There is no difference between a dollar bill and a bond, except that a bond will PAY you.

Therefore when everything is going to shit you WANT that US Bond. And this class, has nothing to do with the desirability of holding Dollars. That's another variable entirely. What we're discussing is the dollar flow between asset classes.

From here it gets complex.

[TalkingDog]

44. To all posters (to this point) Awesome discussion!

Civil yet passionate. Willing to support arguments and statements...

Kudos to all for an enjoyable read.

[xchrom]

45. I think the flight out of places like Asia to the U.S. Was a flight to safety

In spite of our down grade.

Ours isn't the only economy w/ bad signs -- I.e. Japan, corruption in India, serious unrest in Karachi, spreading trouble in the euro zone, property bubble & debt in china mixed w/ a manufacturing slow down.