Paul Krugman picked up on my post commenting on the views of Robert Peston’s pals in the bond market, and Robert Peston has now responded. To characterise this as a debate would I think be wrong. Being the excellent journalist that he is, Peston is reporting the views put to him, rather than taking a particular side. In his response, he does a reasonable job of presenting Paul and my views, and does not argue too hard against them. I have two significant clarifications, and one key point.
The first clarification is that Peston still downplays the importance of having your own central bank and borrowing in your own currency. He says that is ‘partly’ why the UK has avoided the fate of the Eurozone PIIGS. I would argue that is entirely why the UK (and the US, and Japan) have done so. Both Paul and I would argue that fiscal policy should have been expansionary and not contractionary in 2010 , and in my view this would have had no detectable influence on any risk premium. The recent IMF self-evaluation that I discussed here also argues at a global level that the switch to fiscal contraction ('austerity') in 2010 was a mistake caused by a misreading of the Eurozone crisis.
Second, I think what he writes at the end could be misleading. He says: “Now to be clear, there are economists who attack the idea that the deficit and debt can be cut by growing the economy with all the vehemence of Krugman's and Wren-Lewis's lampooning of me and Mr Market.” The minor point is that I did not lampoon either him or the market, but simply what his pals thought about how the market worked. But more seriously, the argument that debt could eventually be lower as a result of growing the economy through fiscal expansion - advanced for example by DeLong and Summers - is different from the point that Paul and I make about the irrelevance of default risk for the UK or US and the consequent foolishness of trying to cut the deficit when interest rates are at their zero lower bound.
Those clarifications apart, the main thing I wanted to say was this. Of course he was just quoting what was said to him by his pals in the bond market, and I would not want him to suppress those views, although I did get some feedback from others in the markets that their own view would have been rather different to his pals. My complaint was that he did not talk to some academic macroeconomists as well, and I explain here why their opinion on issues like this may be at least as useful as some players in the market. If he ever wants my opinion, he just needs to email!