A or B

I am fairly certain at this point that the belief in a possible funding crisis in this country is non-existent, ex. the risks around “default”. Take the following from Paul Krugman:

“The yield curve has been upward-sloping — that is, interest rates on longer-term bonds have been higher than on shorter-term — ever since we hit the zero lower bound, for two reasons. First, markets expect interest rates to go up eventually when the economy recovers. Second, option value: short-term rates can go up but they can’t do down, so you need a premium on anything longer-term.”

His main focus in this NY Times blog post is on the change in T-bill rates and how it could reflect market fears, so the quote above is simply background material. But, in examining it, can you detect just how cavalier he is about what the shape of the yield curve tells us? It’s either a recovering economy or the natural tendency to offer some premium for future inflation. No other options and it never foretells anything ominous. Even though the long end has basically doubled from its lows last year – and moved up meaningfully since early hints of a Fed taper – recovering very little since the “No taper” was announced – all of which runs counter to Krugman’s stated position. Yet, here we are, without anything else to say. And I get the sense that his attitude is shared pretty universally.

With that in mind, I saw a quote from John Kenneth Galbraith today that goes something like this: “In economics, the majority is always wrong.”