Why markets are a bad indicator

Krugman says that markets are not worried about inflation (TIPS spread), and that the US government is financing at very low interest rates ( 3% !). As a consequence he argues, there are no reasons to worry about more debt and stimulus.

Again, right now the bond market doesn’t seem worried about US solvency. And rationally, stimulus spending shouldn’t change that view: with the long-term real interest ratewell below 2 percent, current borrowing has only a trivial effect on the long-run state of the budget.

And soKrugmanand others argue that there are no reasons not to accept a new stimulus package.

Seems logic, but is it ?

It is only logical in the debt philosophy that has brought the advanced economy on the brink of collapse. The very tragedy the BIS is talking about in its latest annual report. The Bank of International Settlements has been probably the only central bank in 2000-2007 that has been very vocal about derivatives, debt and leverage risk in the financial system.

The picture below shows the very problem that we should keep in mind: after the outrageous rise in household debt, public debt has sharply risen to come to the rescue. However, this is not a solution, it is just prolonging and increasing the problem.

Looking at the chart above, I had difficulties in recognizing the difference between Spain, the UK and the US...

But the western debt problem is coming at a particular difficult moment: the aging of the western population will start to climb very strongly in the coming years. The impact on public spending will be huge in many countries (ia. the NL and Belgium).

This just confirms that the adding more debt will not only increase the problem, but aggravate the heritage for the next generation.

Why are the markets a bad indicator

Coming back to the other argument of Krugman to increase debt further: markets are not worrying, so why bother.

Well, that is a very weak argument. Markets are strongly manipulated !

* short rates have been put at almost zero percent, thereby exercising downward pressure on long rates

* central banks are massively buying debt that would push interest rates of some countries higher

* this "known" manipulation is completed with currency support, plunge protection teams and other softer support (peptalking, bank support, support buying by government related entities like in Japan, etc etc)

Today, financial markets are not a perfect indication of the general investor sentiment to say the least. Central banks and governments have been manipulating wide segments of the financial markets.

Therefore, the argument about the current low level of interest rates to justify further stimulus and debt spending is just bogus. We are entering the endgame of a long period of reckless monetary and budgetary policy. THe few highlights are the orthodoxy of the German central bank, the agreement of the Maastricht criteria, and the statements of the BIS.

Or put differently: the market signals are manipulated and distorted by all the measures proposed by the Krugman-school. But then claim these false signals as a green light to do even more of the budgetary and monetary derailment is just incredible.