In his column for the New York Times this morning, economist Paul Krugman draws a parallel between the Christian crusaders of the Middle Ages and contemporary policy crusaders. Whereas members of the former group called out, "God wills it," the latter's battle cry is "The market wills it!"
But, Krugman writes, the turbulent financial landscape this week underscores an inconvenient truth. Just as the outcome of the Crusades indicated that perhaps its propagators had misinterpreted just what it was that God willed, there's a big difference between what latter-day policy crusaders assert the market wants and what the market itself tells us it wants. Take the misguided campaign to convince governments to "cease and desist from their efforts to mitigate economic pain, lest their excessive compassion be punished by the financial gods."
"Investors were supposed to be terrified by budget deficits, fearing that we were about to turn into Greece — Greece I tell you — but year after year, interest rates stayed low," Krugman writes. "The Fed’s efforts to boost the economy were supposed to backfire as markets reacted to the prospect of runaway inflation, but market measures of expected inflation similarly stayed low."
Ironically, Krugman observes, the market actually seems to be conveying "that we should be running bigger deficits and printing more money." As evidence, Krugman points to this week's plummeting interest rates, which portend "depression and deflation," not the "fiscal crisis and inflation" policy crusaders like Alan Greenspan have long warned about. That investors are pouring their money into government bonds indicates they're looking for shelter amid the gathering economic storm.
More from Krugman's column:
One question you might ask is why the market’s pro-spending, print-more-money message has suddenly gotten louder. My guess is that it’s mainly driven by events in Europe, where the slide into deflation and the growing public backlash against austerity have reached a tipping point. And it’s very reasonable to worry that Europe’s problems may spill over to the rest of us.
In any case, the next time you hear some talking head opining on what we must do to satisfy the markets, ask yourself, “How does he know?” For the truth is that when people talk about what markets demand, what they’re really doing is trying to bully us into doing what they themselves want.