I know Paul thought he was just being relaxed. Moses knows we all have a right to relax de temps en temps but it is a really remarkable slippage. In his latest post he writes:
So: I basically think of asset prices in a Tobin-type stock equilibrium framework (pdf). People make portfolio choices, allocating their wealth among bonds, stocks, etc.. Asset prices – including the famous “q” – rise and fall to match these portfolio choices to the actual asset supplies (emphasis added).
I have never been able to get past the basic misrepresentations of reality that are hard wired into (liberal: both reform and conservative) economists heads. How can a social science do such a violent abstraction? People in general do not allocate their assets into portfolios. I imagine Paul does, as I imagine some retires who do not have retirement plans but nonetheless who have saved must. But these are fleetingly small group of asset allocators. The vast majority of asset allocation is done by a special class of people who work in the FIRE sector for large institutions which in turn attempt to maximize (beat/achieve the average) by any and all means necessary. If there is a mismatch between assets demanded and assets supplied it has nothing much to do with people.
Now none of this really has much to do with Krugman’s post. But it is still incredibly annoying.
At the end of his post Krugman drops this bomb:
Update: Also, if you think that US interest rates are being held down by the fact that in some sense the Treasury hasn’t had to go to the market lately, since the Fed is buying debt — although the Fed isn’t actually buying it direct from Treasury — consider the case of Greeece (sic). Greece isn’t going to the market at all these days, since it’s getting all its funding from the bailout package. That hasn’t stopped the 10-year interest rate on its outstanding debt from reflecting investors’ perception of its underlying solvency:
This is just weird. Paul himself has noted that you just can’t compare Greece to the US–EVER–period. The Greeks do not have currency sovereignty. For all intents and purposes Greece is a province of the EMU. California can go broke the US can’t. Now politically the US federal government can be forced to go marked to market and normally they are but they do not have to as it is a self imposed constraint. That is not to say that there are not consequences to refusing to abide by this solemn constraint it is just to say the US ain’t Greece no matter how many e’s you put in it.
Update: Yes PK is of course right even if the analogy is bad. The point of my post was that loose talk and poorly thought out analogies lead people to think un-rigorously. Specific type of people do asset allocation. California and Greece cand be compared because they are both wards of a larger monetary union. The point is crucial because the discourse on deficits is completely confused at this point and just down right wacky in the US.