Are rising interest rates on Treasury bonds a sign of future inflation? Paul Krugman says no. Niall Ferguson says yes. Daniel Gross surveys their arguments here.
Count me on Krugman’s side. Fear of inflation a few years down the road isn’t completely outlandish, but that’s probably not what the rise in Treasury rates signals. Basically, it’s just the bursting of a bubble. Back when Treasury rates were hovering close to zero, a lot us called this a “Treasury bubble” and wondered how long it could last. Now we have our answer: unless there’s another shock to the system it will have lasted about six months.
The long-term chart below shows the bubble pretty clearly. Six months from now, if rates have continued rising and are in the 8-10% range, then Ferguson will have a stronger point. If, as seems more likely, rates are merely returning to the long-term trendline as investors come out of their fetal crouch and start buying things other than treasury bonds, then it’s basically good news. It means the financial markets are returning to normal.