John Cochrane links to a WSJ editorial and a working paper by Greenlaw, Hamilton, Hooper, and Mishkin. The authors make the point that I have been making, which is that when government has accumulated a lot of debt, an increase in interest rates can be catastrophic. This almost forces the central bank to abandon its inflation-fighting goals when the crunch hits.
On the basis of intellectual history, there is another prominent economist who one might expect to endorse and amplify these concerns. He would dismiss the current low interest rates as Wile E. Coyote market behavior. He would trot out diagrams illustrating multiple equilibria. But that economist seems to have disappeared.
Kyle Bass thinks that this scenario will appear in Japan before it strikes Europe or the United States. If you are familiar with John Mauldin, then you know what Bass is going to say.
Most of the questions that Bass gets are “What should an ordinary investor buy?” Interestingly, I get that question a lot from friends on the left. I think that all of us happen to be at an age, close to 60, where the worst case scenario is that your savings take a big hit. If you were 40, you would figure that your human capital is still your most important asset. If you were 80, you would say that you don’t have to worry about how far your savings will go.
I would say that my worries would go away if the politics in this country shifted toward the right. Presumably, that is not where my friends on the left are coming from. My guess is that they connect their fears about preserving the value of their savings with doubts about the capitalist system in general.
Bass suggests oil wells, apartments, and firms with productive assets. I have shifted in that direction the past couple of years, so anyone who has been betting on the U.S. stock market as a whole has been doing better than I have lately. And I hope they continue to do so. Because there is no hedge against a breakdown of the social fabric, which is what Bass is predicting for Japan. There, if he is correct, the worst case scenario for a 60 year old is about to become reality.
Thanks for the link to the Kyle Bass video. Pretty disturbing.
You say you’d be more comfortable with a shift in US politics to the right. However it seems like the right’s economic prescription has been the same for 30 years now, regardless of the situation – tax cutting can’t be the only right answer to every question. And it seems like the right when in power has been just as good at spending as the left. Perhaps Bass is right that only a true crisis will change some of the political behavior.