Confidence Fairies and Invisible Bond Vigilantes

Paul Krugman has been blaming bad economic decisions on the people who believe in "Confidence Fairies" and "Invisible Bond Vigilantes". I think he has a point.

“The idea that austerity measures could trigger stagnation is incorrect,” declared Jean-Claude Trichet, the president of the European Central Bank, in a recent interview. Why? Because “confidence-inspiring policies will foster and not hamper economic recovery.”

Now I'm starting to make sense of all this. Mr. Trichet is seeing things exclusively from the point of view of his class. Austerity means he and his brothers will not at any time soon, have to increase what they pay the world's governments to protect their billions while millions starve, so they can confidently continue to sit on their piles of cash waiting for things to turn around. But does getting your unemployment check inspire confidence? Or being laid off if one is a government worker? No, but when we talked about confidence, we weren't talking about those people, were we? Or maybe we should, if we truly believe inspiring confidence is a strategy for getting out of the recession/depression, and aren't just talking through our hats.

Bond vigilantes are investors who pull the plug on governments they perceive as unable or unwilling to pay their debts.

Paul Krugman talks as if he has never seen a bond vigilante. In my opinion the point isn't that they've never existed. I think in fact that smaller weaker countries that were over a barrel, or navigating some extremely difficult transition did in fact have their very constitutions formed by the hammer blows of the bond vigilanties. I am thinking of what I read in the Shock Doctrine about South Africa, Russia, other former Warsaw Bloc menbers, and various Latin American countries especially. To punish the South African currency on the day there is talk of any sort of constraint on foreign ownership seems quite feasible to me, and many times this and similar things did occur, based on what I've read (I think the book has some problems in its overall framing of what happenned, but do not by any means think it is based on total fabrication. If anyone wants to point me to evidence to the contrary, feel free.

You have, in fact something going on in the public arena - critical decisions being made about how the South African or Russion economy will interact with the rest of the world. It is seen as precedent setting. You have one or more strong centralized bodies of the world's wealth handlers, like the IMF, and no doubt people writing alarming editorials in the Wall Street Journal, or Wall Street blogs or newsletters on a day by day or even hour by hour basis, in the case of the blogs/newsletters when the precarious new or newly reconfigured government makes a "misstep". And it was cheap to punish these small or weak countries. You move your investment somewhere else; most of the world's economy is reasonably healthy, so that is not a problem.

But we cannot simply extrapolate this to the current situation, and the American economy or even moderately large western economies. Who is going to jerk hundreds of billions of dollars out ot the American economy based on an alarmist editorial or emotional reaction "Oh my God, how dare they flout the laws of sacred economics!". No, they have to think about whether the proposed move, even by their economic theories, is all that catastrophic really, and where is a better place to put that investment.