TightWind is written by Kyle Baxter. Stay Hungry. Stay Foolish.

Paul Krugman on how the government will respond to rising debt:

How will the train wreck play itself out?… But my prediction is that politicians will eventually be tempted to resolve the crisis the way irresponsible governments usually do: by printing money, both to pay current bills and to inflate away debt.

And as that temptation becomes obvious, interest rates will soar. It won’t happen right away.… But unless we slide into Japanese-style deflation, there are much higher interest rates in our future.

I think that the main thing keeping long-term interest rates low right now is cognitive dissonance. Even though the business community is starting to get scared — the ultra-establishment Committee for Economic Development now warns that “a fiscal crisis threatens our future standard of living” — investors still can’t believe that the leaders of the United States are acting like the rulers of a banana republic. But I’ve done the math, and reached my own conclusions — and I’ve locked in my rate.   

Krugman’s figured it out, right?

Well, no. That was Krugman in March 2003. Today, he’s taking every opportunity to justify sky-high debt and new government spending.

Funny how a change of heart for Krugman on government debt and spending corresponds with a change of party in control in Washington.

I wonder what that might mean.

(Via Greg Mankiw.)