Nobel Laureate Paul Krugman: "The Bond Market Is Looking Remarkably Grim"

Nobel Laureate Paul Krugman: "The Bond Market Is Looking Remarkably Grim"

Op-Ed Columnist, David Leonhardt, The New York Times

Again, I’m taking a break from writing the newsletter until Labor Day. This week, I’m using this space to introduce you to some other Opinion newsletters.

Today, you’ll find an excerpt from the latest edition of Paul Krugman’s weekly newsletter. Paul is a Nobel Prize winning economist and a newspaper columnist. It’s truly an unusual combination — the ability both to do world-class academic work and to communicate clearly to nonexperts.

After Paul’s thoughts, you’ll find — as always — links to the full Opinion report of The Times. Here’s Paul on the “profound pessimism” of the bond market — the yield on 10-year Treasury bonds had slumped to 1.59 percent by the end of trading on Wednesday, from a peak of 3.2 percent last fall:

“Why does the bond market reflect economic expectations? If investors expect a boom, they also expect the Fed to try to rein in the boom by raising short-term interest rates (which it more or less directly controls), to head off potential inflation. The prospect of higher short-term rates then leads to higher long-term rates, because nobody wants to lock money in at a low yield if returns are going up. Conversely, if investors expect a slump, they expect the Fed to cut rates, and pile into long-term bonds to lock in returns while they can.

So the slump in long-term yields … says that investors have grown drastically less sanguine about the economy. Long-term rates are now notably lower than short-term rates — and this kind of ‘yield curve inversion’ has in the past consistently been the precursor to recession.

Bond investors could, of course, be wrong — there are some people out there claiming that we’re in a bond bubble. And so far the real economy, as measured by G.D.P., job growth, and all that, is still chugging along. But as I said, there’s clearly a wave of pessimism sweeping the market. What’s it about?

One answer is that last fall many investors were looking at a couple of quarters of high growth, and thinking that this might be the start of an extended boom. Serious economists warned that this growth was a temporary lift — a ‘sugar high’ — driven by the shift from fiscal austerity to what-me-worry deficit finance. But at least some people bought into the Trumpist line that tax cuts were going to produce an enduring rise in the growth rate.

Since then, however, it has become clear that the tax-cut boost was indeed a one-time thing. In particular, there has been no sign of the promised surge in business investment.

At the same time, Trump’s trade war may be starting to take a toll. In particular, the uncertainty may be deterring business spending. Whether new tariffs would hurt or help your business, it now makes sense to hold off on plans to expand, until you see what he actually does.

Finally, economic troubles in the rest of the world — several major European economies are quite possibly in recession — are filtering back to the U.S.

Now, most economists aren’t predicting a recession here, for good reason. The truth is that nobody is very good at calling turning points in the economy, and calling a recession before it’s really obvious in the data is much more likely to get you declared a Chicken Little than hailed as a prophet. (Believe me, I know all about it.) But the bond market, which doesn’t worry about such things, is looking remarkably grim.”