EK: You think the danger posed by the long-term deficit is overstated by most economists and economic commentators.Holy hell, that actually makes sense. Either the deficit isn't a danger, or the markets are stupid to the point where trying to fix the deficit doesn't matter.
JG: No, I think the danger is zero. It's not overstated. It's completely misstated.
EK: Why?
JG: What is the nature of the danger? The only possible answer is that this larger deficit would cause a rise in the interest rate. Well, if the markets thought that was a serious risk, the rate on 20-year treasury bonds wouldn't be 4 percent and change now. If the markets thought that the interest rate would be forced up by funding difficulties 10 year from now, it would show up in the 20-year rate. That rate has actually been coming down in the wake of the European crisis.
So there are two possibilities here. One is the theory is wrong. The other is that the market isn't rational. And if the market isn't rational, there's no point in designing policy to accommodate the markets because you can't accommodate an irrational entity.
That's actually brilliant.
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Of course, I tend to lean towards the latter. But absolutely, the same people who ascribe deity-like status to markets either must admit that the deficit is not unsolvable or we would have Greek rates of interest, or the problems that the MSM and conservatives freak out about are just a bunch balderdash.
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