What is Paul Krugman smoking?

http://brucekrasting.blogspot.com/2009/11/best-buykrugman-and-carry-trade.html On ABC%u2019s "This Week" show there were some interesting thoughts from Paul Krugman. He remarked: The cost of the deficit is only 1.2% real rate of interest at the Federal level.%u201D This is economic speak. What Mr. Krugman was saying is that the Government can borrow long term at 3.2% and inflation is 2% so the... [more]

http://brucekrasting.blogspot.com/2009/11/best-buykrugman-and-carry-trade.html On ABC%u2019s "This Week" show there were some interesting thoughts from Paul Krugman. He remarked: The cost of the deficit is only 1.2% real rate of interest at the Federal level.%u201D This is economic speak. What Mr. Krugman was saying is that the Government can borrow long term at 3.2% and inflation is 2% so the real cost of debt is only 1.2%. In response, George Will made the point: "In ten years the interest cost of servicing the debt will go to $700 billion per year!" Mr. Krugman responded: In ten years GDP will be $20 trillion, debt service would still be 3.5%. %u201CThat doesn%u2019t sound too bad%u201D. Mr. Krugman believes in the ultimate carry trade. His view is that growth will come from affordable (cheap) debt capital. He thinks that the US can go to 100% Debt/GDP without upsetting the applecart. I think he is dead wrong. We are at the point where the laws of big numbers start to come into play. For Mr. Krugman%u2019 view to work out we would have to successfully sell an additional $900 billion of debt each year for the next decade. I think that is an impossible task. But what is truly impossible is that that amount of debt can be sold without an increase in the 1.2% after inflation cost of the debt that Mr. Krugman is relying upon. You can just fool so many bondholders for so long before they look elsewhere. The cost of servicing our debt will likely double. The increase will be a combination of a general rise in interest rates and in increase in the %u201Cspread%u201D that the US will have to pay. If debt expense was a modest 6% it would put the cost at $1.2 trillion. I don%u2019t think we will get to that level. We will blow up first. The Carry Trade is fraught with risk. You can lose six months of positive carry in A$ in just one day in the FX market. Best Buy can create sales from free money, but what credit losses will they incur in the process? [less]