Commentary

Doomsday Is Doomed

This article originally appeared in the Washington Times on May 15, 2005.
“The doomsday theme is seeping into the normally circumspect world of economics,” notes New York Times writer Daniel Gross. Actually, the doomsday theme never leaves the New York Times for long. It just changes form.

In “The Perfect Storm That Could Drown the Economy,” Mr. Gross claims, “increasingly, economists are prophesying that the American economy as a whole may be sailing into choppy waters.” He finds several perpetually gloomy people to quote, including four refugees from the perpetually gloomy International Monetary Fund.

Yet as former Clinton adviser Jeff Frankel confesses, he and others “have been warning of this hard-landing scenario for more than 20 years.”

In this latest retelling, the 1983 hard-landing fable will at last turn into the long-predicted “perfect storm” the moment foreign central banks cut back on buying U.S. Treasury bonds. “[If] Asian central banks decide that they already have too many dollars,” said Paul Krugman, “[that] could easily turn our mild case of stagflation into something much more serious.”

Mr. Gross hangs this same story on another Clintonian economist, Nouriel Roubini, who bravely “estimates that if China cut its rate of accumulation by [$100 billion a year], long-term interest rates in the United States could rise by 200 basis points [2 percentage points] over a few months and the value of the dollar would fall.”

The publicly held federal debt exceeded $4.4 trillion at the end of last year. Even that is a small fraction of the global market for financial assets. Therefore, no defensible economic model could possibly suggest U.S. or world interest rates would move perceptibly simply because of a $100 billion slowdown in one country’s yearly accumulation of U.S. government securities.

In fact, we already found out what happens when foreign central banks sharply cut back purchases of U.S. Treasury securities. Nothing happens — absolutely nothing.

On April 26, the Wall Street Journal reported, “In recent months, private investors have replaced with gusto official institutions as the driver behind foreign flows into Treasuries. … Treasury data show that private investors accounted for $31.5 billion, or 74 percent, of the $42.5 billion of Treasuries bought by foreigners in February.”

That cutback in foreign central bank purchases of Treasuries in February was an extension of a yearlong trend. Foreign official purchases of Treasury securities declined from $101.7 billion in the first quarter of last year to $63 billion in the second, $54.7 billion in the third and $42.2 billion in the fourth. Those figures are quarterly, not annual. They correspond to a $238 billion annualized reduction in foreign official accumulation of U.S. Treasuries — much larger and faster than Mr. Roubini’s hypothetical $100 billion cutback over a full year.

The Apoplectic Apocalypse of Messrs. Krugman and Roubini has already come and gone, yet nobody noticed. The 10-year Treasury bonds yield did not rise by the forecast 2 percentage points: it fell from 4.7 percent a year ago to 4.2 percent lately.

Facts don’t matter when business news is really politics in disguise. Whenever the wrong political party controls the White House and Congress, the mainstream media feel compelled to predict some looming economic disaster, and to keep doing so shamelessly and erroneously year after year.

The “business news” thus careens between warning of a hard landing, deflation or stagflation — any imaginable conjecture that depends on strong words, weak logic and no facts.

Mr. Krugman, New York Times columnist, thus flip-flopped adroitly from warning of deflation and a “Japanese-style quagmire” in May 2003 to scenting a “whiff of stagflation” in April 2005. Why? What changed between those dates?

U.S. economic growth has averaged 4.3 percent over the past eight quarters. So much for the “stagnation” part of last month’s stagflation stories.

As for inflation, we have to first ask what became of that ominous deflation Mr. Krugman, Alan Greenspan and others warned of just two years ago?

When the Bureau of Economic Analysis recently reported its measure of core inflation (the PCE deflator less energy and food) was up 1.7 percent in March from a year ago, the Wall Street Journal exclaimed that was “the highest in two years.” Actually, it was the highest in four months, having been up 1.7 percent in November. An alternative market-based measure has held at 1.7 percent for five months — too boring to report.

Even if a 1.7 percent rate for core inflation was really “the highest in two years,” the irony is nearly everyone (except me) thought that same number was uncomfortably low two years ago. As recently as May 2003, the Fed warned of “an unwelcome substantial fall in inflation.”

In the first quarter of 2003 — at the height of the “deflation” scare — the year-to-year increase in the core PCE deflator was 1.6 percent. In first-quarter 2005, that same measure was again up 1.6 percent — just as low as it was during the “deflation” of 2003, and lower than in 2001-2002. What was called deflation two years ago is called inflation today.

Because last month’s stagflation scare hinged on such creative redefinitions of inflation and stagnation, it is already tiresome. So desperate doomsday peddlers tried recycling their tried-and-untrue “hard landing” scare, equally out of touch with reality.

It may prove amusing to see what sort of imaginative “business news” they come up with next.

Alan Reynolds is a senior fellow with the Cato Institute and a nationally syndicated columnist.