Assorted Musings

Here are some assorted musings:

1. First there was the interest-rate conundrum in the mid-2000s that stumped the Fed, now there is the steepening yield curve mystery from last week that has the Fed perplexed. The Treasury yield curve is so frustrating some times for the Fed. Fortunately, Rebecca Wilder has some insights on this latest yield curve development.
2. Is Paul Krugman throwing the baby out with the bathwater in his latest column? He argues the fundamental reason we are in this bind is that the financial sector was deregulated in the 1980s, financial innovation took off, and as a result there has been too much borrowing since then. I think many observers would agree there has been a lot of borrowing, but does Krugman really want to inhibit financial innovation just because it makes its easier for individuals to make bad financial decisions? Most inventions and innovations have the potential for creating problems, but instead of outlawing them we try to manage them.
3. Brad Sester notes total U.S. borrowing from the rest of the world is down, even though U.S. government borrowing is exploding. That is because households and business are borrowing a lot less. As a result, government borrowing is offsetting the fall in private borrowing. Here is his summary graph (click on figure to enlarge):
   
   
As Sester explains, though, once the economy recovers and the private sectors starts borrowing again, government borrowing must come down to keep total U.S. borrowing in line. Observers like John Taylor, Niall Ferguson, John Maudlin, and others, however, are concerned that future government spending will not be reversed once the economy recovers. If so, the real question becomes what is the U.S. Debt-to-GDP number that is too big?