By Paul Krugman
It has been a strange few days on the Donald Trump front: He said something about himself that I actually believe and something about the economy that’s mostly true.
On the personal side, Trump has been sounding a lot like Adolf Hitler lately — I don’t mean his general tone, I mean his specific statement last week at a New Hampshire rally that immigrants are “poisoning the blood of our country,” echoing what Hitler wrote in “Mein Kampf” almost word for word. (And if you think it was just a one-off, he said the same thing in a September interview.) But Trump claims never to have read “Mein Kampf,” and I believe him, just as I believe that he’s barely skimmed the Bible or any of the great books or, I would guess, “The Art of the Deal.” Pretty clearly, reading isn’t his thing.
What’s happening, presumably, is that Trump talks to people who have read Hitler, approvingly, and that’s how Nazi language gets into his speeches. Are you reassured?
On the economic side, the stock market has recently been close to record highs, but Trump has dismissed these gains as just making “rich people richer.”
It’s hard to imagine a worse person to deliver this message, since Trump constantly boasted about the stock market when he was in office and predicted that the election of Joe Biden in 2020 would cause the market to crash.
As an aside, one thing I haven’t seen emphasized in the vibecession debate — why are Americans so negative about an economy that looks very good by conventional measures? — is the fact that Trump himself keeps saying things about the economy that are flatly false, including his claim that the price of bacon is up “five times” under Biden. It’s actually up 18%.
Nonetheless, Trump is correct to suggest that most people won’t see much personal benefit from rising stocks. A narrow majority of Americans have some stake in the stock market, largely indirectly, via retirement accounts. But for most people, these stakes are small, while the richest 10% of families on average own millions in stocks.
Although stock prices don’t directly matter much for most people, however, you know what does matter? Bond prices, which are the flip side of interest rates. (Higher bond prices correspond with lower interest rates, and vice versa.)
Interest rates soared for much of 2023; the benchmark yield on 10-year bonds hit almost 5% in October, up from around 2% before the pandemic. Since then, however, yields have retraced a significant part of that rise, down more than 1 percentage point. Why? As I’ll explain in a minute, nobody really knows. But rising interest rates threatened to have widespread negative effects, so seeing them recede even part of the way is very good news.
Why are high interest rates a problem? First and foremost because high rates deter investment. Businesses are less willing to make capital outlays when interest costs are high. For example, high rates were a factor in the delay or cancellation of several offshore wind projects. Mortgage rates are a key expense for homebuyers, so high rates are bad for the housing market and housing construction.
There are also other problems with high rates. In the U.S. system, high mortgage rates tend to freeze people in their houses, making them unwilling to sell because that would mean giving up mortgages locked in at lower rates. And the falling value of banks’ bond portfolios — again, bond prices are the flip side of interest rates — helped cause a brief banking panic in March. So far, that panic seems to have been contained, but falling rates clearly reduce the risk of a second round.
Oh, and the cost of U.S. government borrowing has a big impact on the federal fiscal outlook, which isn’t healthy but looks less dire than it did two months ago.
So, rising bond prices are good news all around. What’s going right?
Basically, nobody knows. When an individual stock rises or falls, that might reflect traders’ special information or expertise. But bond traders work off the same macroeconomic data available to anyone with internet access.
Analysts offered a variety of explanations for rising interest rates this year — it was the federal budget deficit, which shot up because of a decline in revenues; it was the boost to business investment caused by the Biden administration’s industrial policies; it was optimism about future economic growth driven by artificial intelligence. But as far as I can tell, there’s no solid evidence for any of these hypotheses.
And there hasn’t been enough information over the past two months to justify significantly revising these stories. We’ve gotten good news on inflation, which points to significant reductions in short-term interest rates (which the Federal Reserve controls) over the next year or two. But that shouldn’t be having big effects on long-term interest rates, which are supposed to reflect expected Fed policy over the course of many years — yet, even 30-year rates are down about 1 percentage point.
My guess is that we’re mainly looking at market psychology rather than deep economic forces. Whatever is happening, however, it’s good news. Never mind the stock market; the rising bond market has given us a holiday gift, and a reason to be more optimistic about next year.