Paul Krugman Today

Why We Need An Inflation Target.

"Look at the lower left-hand corner: the real interest rate on 5-year inflation-protected securities is now negative. In other words, prospects for other investments are so poor that some investors prefer a safe asset that doesn’t quite keep up with inflation.

Yet to maintain employment, we need to sustain spending, one way or another. One way is to have the government take advantage of its low financing costs to spend on useful things; but the deficit peacocks in Congress are blocking that solution. Another is to get real interest rates low enough to get the private sector spending; but that, as we can see, means that the real interest rate on medium-term government debt has to be negative."

And also, The Meaning Of 2.71 which is the 10-year bond rate.

"As it happens, interest rates are also now lower than they were when the big debate over fiscal policy and its interest-rate effects began. For those who don’t remember or don’t know, this started with the claim that government borrowing would send rates soaring, crowding out private investment, and that this would abort the recovery. I tried at the time to point out that this reflected a failure to understand basic macroeconomics; but as usual, made no headway with the culprits."

And, The Price Stability Trap. "The analysis also suggests something else, however: as the inflation rate goes toward zero, it seems to become “sticky”: in the modern world, rapid deflation doesn’t happen, and in fact slight positive inflation often persists in the face of an obviously depressed economy."

"And this raises the specter what I think of as the price stability trap: suppose that it’s early 2012, the US unemployment rate is around 10 percent, and core inflation is running at 0.3 percent. The Fed should be moving heaven and earth to do something about the economy — but what you see instead is many people at the Fed, especially at the regional banks, saying ‘Look, we don’t have actual deflation, or anyway not much, so we’re achieving price stability. What’s the problem?’ And the slump will just go on."

As a bonus, The Baseline Scenario writes Why Won’t “Fiscal Hawks” Discuss The Real Issues?. "To see where our current deficits come from, we need only look at the budget office’s baseline projections. In January 2008, the budget office projected that total government debt in private hands – the best measure of what the government owes – would fall to $5.1 trillion by 2018 (23 percent of GDP). As of January 2010, the budget office now projects that debt will rise to $13.7 trillion (more than 65 percent of GDP) – a difference of $8.6 trillion. Of this change, 57 percent is due to decreased tax revenues resulting from the financial crisis and recession; 17 percent from increases in discretionary spending, much of it the stimulus package necessitated by the financial crisis; and another 14 percent to increased interest payments on the debt – because we now have more debt."

"What do matter are taxes and entitlements. Therefore, the coming battle over the Bush tax cuts is of real importance. According to the Congressional Budget Office, extending the Bush tax cuts would add $2.3 trillion to the total 2018 debt. The single biggest step our government could take this year to address the structural deficit would be to let the tax cuts expire. And a credible commitment to long-term fiscal sustainability should reduce interest rates today, helping to stimulate the economy."