I’ve been getting questions about what happens when the Fed wraps up QE2 — related especially to Bill Gross’s public view that interest rates will shoot up. This is related to the question of the extent to which QE2 has kept interest rates low. So a quick exposition of my theoretical position, which also happens to be more or less standard economics.
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.
On this view asset purchases matter because over time they change the stocks of assets available : by buying long term federal debt, the Fed takes some of that debt off the market, and hence drives up the price of what’s left, reducing interest rates. The flow – the rate of purchases – matters only to the extent that it affects expected returns.
On this view, the fact that the Fed is currently buying some large fraction of debt issuance is irrelevant; interest rates are determined by the willingness at the margin of private investors to hold the existing stock of debt, regardless.
This view could be wrong, or at least incomplete. Investor inertia – a tendency to leave funds where they are – could give flows an independent role. But how much of a role? If you believe that it is obvious that rates will spike as soon as QE2 ends, you have to ask why investors aren’t moving out of US debt now in anticipation; you don’t have to believe in efficient markets to believe that totally obvious gains or losses will be anticipated.
I’d also add that if flows matter a lot — if it’s hard to persuade investors to buy a suddenly increased quantity of newly issued Treasuries per month, as opposed to being willing to hold the total amount of Treasuries outstanding — the big shift into budget deficits and the corresponding increase in Treasury issuance should have led to sharply rising interest rates. And as you may recall, some people did predict just that — and ended up not just with egg on their faces, but losing a lot of money for their investors.
So I don’t buy the notion that rates are low only because the Fed is doing QE2; if there were really a problem with the marketability of US debt, rates would be high regardless. And so I don’t expect rates to spike when QE2 ends unless there’s good economic news that gives us a reason to believe that the zero-rate policy on short-term rates will end sooner than expected.
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. 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:
Paul Krugman is an Op-Ed columnist for The New York Times.
The House budget proposal shows a huge gap between the two parties' priorities, and the difference should be made clear to voters.
President Obama called the Republicans' bluff on Wednesday and laid out a budget plan that really is serious.
Where's the Democratic vision on the budget?
Once you stop listening to all the swooning and read the numbers, the Republican budget proposal looks like more voodoo economics.
The climate deniers can't handle it when one of their own goes off script.
April 19
Conceding the Principle (Wonkish)On those anti-Keynesian Keynesians.
April 19 //
Stocks, Flows, and Pimco (Wonkish)Treasuries outstanding, or new issues?
April 19 //
Extra Credit?Money and credit are growing slowly, not quickly.
April 19 //
Poor StandardsThey warn, the market yawns.
April 18 //
Bwahahaha!Ah, but the strawberries, that's ... that's where I had them.
From the Opinion Blogs Schott's Vocab Daily Lexeme: DryasdustThe name of a fictitious person to whom Sir W. Scott pretends to dedicate some of his novels; hence, a writer or student of antiquities, history, or statistics, who occupies himself with the driest and most uninteresting details.
Opinionator What's Worse Than an Oil Spill?The so-called oceanic global warming that we contribute to with ignorance is a greater catastrophe than any spill to date.
Follow The New York Times »FacebookTwitterYouTubeRSS Feeds Paul Krugman Blog RSS Subscribe to Paul Krugman’s Reading List Home World U.S. N.Y. / Region Business Technology Science Health Sports Opinion Arts Style Travel Jobs Real Estate Autos Site Map © 2011 The New York Times Company Privacy Your Ad Choices Terms of Service Terms of Sale Corrections RSS Help Contact Us Work for Us Advertise if (typeof NYTD.Blogs.user != 'undefined') { if(NYTD.Blogs.user.isLoggedIn()) { var dcsvid=NYTD.Blogs.user.getId(); var regstatus="registered"; } else { var dcsvid=""; var regstatus="non-registered"; } } var gaJsHost = (("https:" == document.location.protocol) ? "https://ssl." : "http://www."); document.write(unescape("%3Cscript src='" + gaJsHost + "google-analytics.com/ga.js' type='text/javascript'%3E%3C/script%3E")); var pageTracker = _gat._getTracker("UA-4406282-48"); pageTracker._initData(); pageTracker._trackPageview(); document.write('');On those anti-Keynesian Keynesians.
April 19
Stocks, Flows, and Pimco (Wonkish)Treasuries outstanding, or new issues?
April 19 //
Extra Credit?Money and credit are growing slowly, not quickly.
April 19 //
Poor StandardsThey warn, the market yawns.
April 18 //
Bwahahaha!Ah, but the strawberries, that's ... that's where I had them.
From the Opinion Blogs Schott's Vocab Daily Lexeme: DryasdustThe name of a fictitious person to whom Sir W. Scott pretends to dedicate some of his novels; hence, a writer or student of antiquities, history, or statistics, who occupies himself with the driest and most uninteresting details.
Opinionator What's Worse Than an Oil Spill?The so-called oceanic global warming that we contribute to with ignorance is a greater catastrophe than any spill to date.
Follow The New York Times »FacebookTwitterYouTubeRSS Feeds Paul Krugman Blog RSS Subscribe to Paul Krugman’s Reading List Home World U.S. N.Y. / Region Business Technology Science Health Sports Opinion Arts Style Travel Jobs Real Estate Autos Site Map © 2011 The New York Times Company Privacy Your Ad Choices Terms of Service Terms of Sale Corrections RSS Help Contact Us Work for Us Advertise if (typeof NYTD.Blogs.user != 'undefined') { if(NYTD.Blogs.user.isLoggedIn()) { var dcsvid=NYTD.Blogs.user.getId(); var regstatus="registered"; } else { var dcsvid=""; var regstatus="non-registered"; } } var gaJsHost = (("https:" == document.location.protocol) ? "https://ssl." : "http://www."); document.write(unescape("%3Cscript src='" + gaJsHost + "google-analytics.com/ga.js' type='text/javascript'%3E%3C/script%3E")); var pageTracker = _gat._getTracker("UA-4406282-48"); pageTracker._initData(); pageTracker._trackPageview(); document.write('');Treasuries outstanding, or new issues?
April 19
Extra Credit?Money and credit are growing slowly, not quickly.
April 19 //
Poor StandardsThey warn, the market yawns.
April 18 //
Bwahahaha!Ah, but the strawberries, that's ... that's where I had them.
From the Opinion Blogs Schott's Vocab Daily Lexeme: DryasdustThe name of a fictitious person to whom Sir W. Scott pretends to dedicate some of his novels; hence, a writer or student of antiquities, history, or statistics, who occupies himself with the driest and most uninteresting details.
Opinionator What's Worse Than an Oil Spill?The so-called oceanic global warming that we contribute to with ignorance is a greater catastrophe than any spill to date.
Follow The New York Times »FacebookTwitterYouTubeRSS Feeds Paul Krugman Blog RSS Subscribe to Paul Krugman’s Reading List Home World U.S. N.Y. / Region Business Technology Science Health Sports Opinion Arts Style Travel Jobs Real Estate Autos Site Map © 2011 The New York Times Company Privacy Your Ad Choices Terms of Service Terms of Sale Corrections RSS Help Contact Us Work for Us Advertise if (typeof NYTD.Blogs.user != 'undefined') { if(NYTD.Blogs.user.isLoggedIn()) { var dcsvid=NYTD.Blogs.user.getId(); var regstatus="registered"; } else { var dcsvid=""; var regstatus="non-registered"; } } var gaJsHost = (("https:" == document.location.protocol) ? "https://ssl." : "http://www."); document.write(unescape("%3Cscript src='" + gaJsHost + "google-analytics.com/ga.js' type='text/javascript'%3E%3C/script%3E")); var pageTracker = _gat._getTracker("UA-4406282-48"); pageTracker._initData(); pageTracker._trackPageview(); document.write('');Money and credit are growing slowly, not quickly.
April 19
Poor StandardsThey warn, the market yawns.
April 18 //
Bwahahaha!Ah, but the strawberries, that's ... that's where I had them.
From the Opinion Blogs Schott's Vocab Daily Lexeme: DryasdustThe name of a fictitious person to whom Sir W. Scott pretends to dedicate some of his novels; hence, a writer or student of antiquities, history, or statistics, who occupies himself with the driest and most uninteresting details.
Opinionator What's Worse Than an Oil Spill?The so-called oceanic global warming that we contribute to with ignorance is a greater catastrophe than any spill to date.
Follow The New York Times »FacebookTwitterYouTubeRSS Feeds Paul Krugman Blog RSS Subscribe to Paul Krugman’s Reading List Home World U.S. N.Y. / Region Business Technology Science Health Sports Opinion Arts Style Travel Jobs Real Estate Autos Site Map © 2011 The New York Times Company Privacy Your Ad Choices Terms of Service Terms of Sale Corrections RSS Help Contact Us Work for Us Advertise if (typeof NYTD.Blogs.user != 'undefined') { if(NYTD.Blogs.user.isLoggedIn()) { var dcsvid=NYTD.Blogs.user.getId(); var regstatus="registered"; } else { var dcsvid=""; var regstatus="non-registered"; } } var gaJsHost = (("https:" == document.location.protocol) ? "https://ssl." : "http://www."); document.write(unescape("%3Cscript src='" + gaJsHost + "google-analytics.com/ga.js' type='text/javascript'%3E%3C/script%3E")); var pageTracker = _gat._getTracker("UA-4406282-48"); pageTracker._initData(); pageTracker._trackPageview(); document.write('');They warn, the market yawns.
April 18
Bwahahaha!Ah, but the strawberries, that's ... that's where I had them.
From the Opinion Blogs Schott's Vocab Daily Lexeme: DryasdustThe name of a fictitious person to whom Sir W. Scott pretends to dedicate some of his novels; hence, a writer or student of antiquities, history, or statistics, who occupies himself with the driest and most uninteresting details.
Opinionator What's Worse Than an Oil Spill?The so-called oceanic global warming that we contribute to with ignorance is a greater catastrophe than any spill to date.
Follow The New York Times »FacebookTwitterYouTubeRSS Feeds Paul Krugman Blog RSS Subscribe to Paul Krugman’s Reading List Home World U.S. N.Y. / Region Business Technology Science Health Sports Opinion Arts Style Travel Jobs Real Estate Autos Site Map © 2011 The New York Times Company Privacy Your Ad Choices Terms of Service Terms of Sale Corrections RSS Help Contact Us Work for Us Advertise if (typeof NYTD.Blogs.user != 'undefined') { if(NYTD.Blogs.user.isLoggedIn()) { var dcsvid=NYTD.Blogs.user.getId(); var regstatus="registered"; } else { var dcsvid=""; var regstatus="non-registered"; } } var gaJsHost = (("https:" == document.location.protocol) ? "https://ssl." : "http://www."); document.write(unescape("%3Cscript src='" + gaJsHost + "google-analytics.com/ga.js' type='text/javascript'%3E%3C/script%3E")); var pageTracker = _gat._getTracker("UA-4406282-48"); pageTracker._initData(); pageTracker._trackPageview(); document.write('');Ah, but the strawberries, that's ... that's where I had them.
The name of a fictitious person to whom Sir W. Scott pretends to dedicate some of his novels; hence, a writer or student of antiquities, history, or statistics, who occupies himself with the driest and most uninteresting details.
The so-called oceanic global warming that we contribute to with ignorance is a greater catastrophe than any spill to date.
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