Not Everyone in Finance has Their Head Buried in the Sand….

Paul Krugman asks an interesting question this morning:

“The question is why so many people in finance gravitate toward that view [that emphasizes the dangers of deficits and monetary expansion], and cling to it despite what is at this point overwhelming evidence that it’s wrong.”

He goes on to cite how so many in the world of finance thought that high deficits and QE would lead to higher interest rates, a potential solvency problem in the USA, high inflation, etc.  He goes on to argue that you didn’t need to understand the financial asset world to understand what was going on, but needed a macroeconomic understanding of the liquidity trap concept.  But this can’t be right because there were lots of people in finance (like most of the readers of this website) who understood that the aforementioned concerns were legitimate. And we understood those concepts through an operational understanding of the monetary system, not an understanding of “liquidity traps”. For instance, I’ve consistently, for 5 years, pointed out:

• That Bill Gross was wrong to ask “who will buy the bonds”? – Who Will Buy the Bonds, March 2011
• That the “bond bubble” was a pure myth – The Myth of the Bond Bubble, August 2010
• That the fears over a solvency crisis in the USA were wrong – Why the USA isn’t Going Bankrupt, September 2012
• That Mitt Romney was wrong to claim a bond auction might soon fail in the USA – About the Coming Failed Bond Auction Mitt Romney Predicts, September 2012
• That the worry about “bond vigilantes” was wrong – American Bond Vigilantes, Asleep at the Wheel, July 2011
• That Hyperinflation wasn’t going to result from QE – Hyperinflation: It’s More Than a Monetary Phenomenon, March 2011

These were important predictions.  And I know lots of other people in the financial world who understood the concepts perfectly well without having to understand what a liquidity trap is.  In fact, all that was required was a basic understanding of the monetary system.  As to why so many people continue to believe these things are problems despite the overwhelming evidence otherwise – my guess is politics rules over reason….