For whatever reason

Cross-posted from Credit Writedowns

Paul Krugman has another piece up on MMT. I like this piece a lot more than the last one he wrote. I suggest you read it.

Here’s the one passage I do find troubling, however:

Let’s have a more or less concrete example. Suppose that at some future date — a date at which private demand for funds has revived, so that there are lending opportunities — the US government has committed itself to spending equal to 27 percent of GDP, while the tax laws only lead to 17 percent of GDP in revenues. And consider what happens in that case under two scenarios. In the first, investors believe that the government will eventually raise revenue and/or cut spending, and are willing to lend enough to cover the deficit. In the second, for whatever reason, investors refuse to buy US bonds.

It’s actually just three words that bother me: “for whatever reason”. i think the whole discussion hangs on those three words actually. Interest rates largely reflect the expected path of future policy rates. It does not follow logically for me that investors would refuse to buy US bonds ‘for whatever reason’. Sure, currency revulsion can cause the exchange rate to collapse and inflation to go through the roof. As Dr. Krugman points out, you could even get hyperinflation under certain circumstances.

But as I pointed out earlier today:

In the end, this is about interest rates. Why is Paul Krugman worrying about the US losing access to the bond market when the term structure of the yield curve largely reflects expected future policy rates? We just saw this is true after the Fed moved to permanent zero at the last FOMC meeting. “The 0.375% US Treasury note maturing on 31 July 2013 is now yielding only 19 basis points.” The Fed can do as much ‘financial repression’ as they want by keeping rates below the headline inflation rate since it has monopoly power in the market for base money. Inflation and currency depreciation are the issues – not a steeper yield curve.

Remember, we have just witnessed investors willing to flee to the liquidity of Treasuries even as the government threatened to default on those securities. That doesn’t speak to investors refusing to buy US bonds in the least. I suppose they could do at some undetermined point in the future. However, saying ‘for whatever reason’ presupposes the outcome. I need to see the steps that get us from 2.25% 10-year rates to 4 or 5% without the Fed set to actively raise rates because the only way rates are going higher is because the Fed is forced by inflation to raise them.

Source: MMT, Again, Paul Krugman

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About Edward Harrison

I am a banking and finance specialist at the economic consultancy Global Macro Advisors. Previously, I worked at Deutsche Bank, Bain, the Corporate Executive Board and Yahoo. I have a BA in Economics from Dartmouth College and an MBA in Finance from Columbia University. As to ideology, I would call myself a libertarian realist - believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Having lived in a lot of different places, I tend to take a global approach to economics and politics. I started my career as a diplomat in the foreign service and speak German, Dutch, Swedish, Spanish and French as well as English and can read a number of other European languages. I enjoy a good debate on these issues and I hope you enjoy my blogs. Please do sign up for the Email and RSS feeds on my blog pages. Cheers. Edward


  1. Diego Méndez

    I am really liking this debate. Let me humbly suggest a couple of conditions that would fit into “for whatever reason”:

    1. The world keeps on growing while the US keeps its large output gap, i.e. the US imports inflation. Some not well-understood short-term inflexibilities in the US (e.g. an economy based on cheap energy, with some US regions even more so than others) combine with imported inflation to create second-round effects, so you have real inflation and a large output gap.

    If I read Krugman correctly, in that case MMT policies would turn stagflation into currency destruction.

    2. Rational investors expect the Fed and the US Government not to behave rationally. They have some new game theories that fit perfectly into what’s happening: politicians having skewed incentives, and they think there is a real possibility that the US goes bankrupt because of irrational mismanagement.

    (After all, this is what’s happening in Europe.)

    Then the US has no bond market acces anymore.

    Another variant of 2) is: investors expect China to go Lebensraum-hungry and dump all US dollar assets to create a financial panic.

    Again, MMT policies would turn a financial panic into currency destruction.

    1. Paul Tioxon

      While Krugman is an economist, is it possible he is referring to events that actually occur that have nothing to do with yield curves, interest rates or money? The one dimensional political analysis here does not quite seem to grasp that there are other, whatever reasons, not economic or financial that are problematic. And of course, the nuclear stockpiles, the earthquakes that cause nuclear power plants to wreck a society, the things that money can’t buy, nor love for that matter, may not make the world go round like filthy lucre, but they sure make things go boom.

      1. Nathanael

        I’m sure Krugman is referring to an outside, non-economic event.

        Trouble is, in case of such an outside, non-economic event causing domestic and foreign refusal to buy US bonds, they’ll also (domestic and foreign!) refuse to buy dollars, so currency collapse is inevitable in that case anyway.

        MMT analysts have pointed this out. So you’re no worse off than you were before.

    2. reslez

      The world keeps on growing while the US keeps its large output gap

      Wait, what? This is a ludicrous mischaracterization of MMT. You repeatedly posit an “output gap” and ignore that MMT’s core recommendation is to increase federal spending until the output gap is diminished.

      You then talk about something that’s probably demand leakage. That would have to be addressed with targeted stimulus or trade policy.

      Rational investors […] think there is a real possibility that the US goes bankrupt because of irrational mismanagement

      Then they are not actually rational because under MMT there is no possibility the US can go bankrupt.

      Then the US has no bond market acces anymore.

      MMT would say bond market access is irrelevant. The US govt has no need to borrow.

      [I]nvestors expect China to go Lebensraum-hungry and dump all US dollar assets to create a financial panic

      Then China’s currency would skyrocket which would crater their economy, which is export-driven, and improve our trade deficit.

      I realize that it’s fun to postulate all kinds of crazy scenarios (and I’m glad you’re enjoying it) but to imagine things happening in a vacuum while ignoring everything else that would necessarily result lacks all credibility. This is why “for whatever reason” is so unconvincing.

      1. Diego Méndez

        I suggest you read my post again and try very hard to understand me. Maybe you will, and then you’ll see how much nonsense you have written.

        In the circumstances above, applying MMT policies to close the output gap, stop the Government from going bankrupt through inflation, or a stagnant US starting a trade war against a high-growth rest of the world, would lead to currency destruction.

        Will it close the output gap? Will it stop the Government from going bankrupt? Will it stop demand leakage? Yes, yes and yes, it will, but this will lead to currency destruction (which is a far worse condition).

        Of course, those starting conditions are merely hypothetical, but Krugman’s case is clear-cut. MMT defenders need a better case if they want to be taken seriously.

  2. Mondo


    First of all, I think it has been a very useful exercise to clarify the thoughts on MMT and the actual effects budget deficits may have in light of our fiat currency world. We all have to thank you for furthering the discussion with Paul Krugman.

    But, isn’t it reasonable to posit that investors may refuse to buy US bonds ‘for whatever reason’ ? We indeed don’t know what those reasons could be, and right now there don’t seem to be any indications that investors will indeed steer away from US bonds anytime soon. However, markets can be quite irrational, or there may be a step change like the one alluded to in Chris Whalen’s latest weekly (a new monetary order based on SDR’s) which may have all kinds of unforeseen effects, especially if investors start to believe that the US government wants to ’embrace global hyper-inflation via the IMF’ as one source is saying.

    It doesn’t matter if Chris Whalen or his source is right, it only matters if such an opinion takes hold, and all of a sudden Paul Krugman’s assumption isn’t so outlandish anymore. Therefore, I think it is absolutely justified to look into what such an investor strike would mean, and the debate should really be about Paul Krugman’s thoughts – do you agree with what he is writing about the possible consequences ?

    1. Nathanael

      See my comment above. If US bonds cannot be sold for extrinsic political reasons, the currency also won’t be saleable… and so you’re completely screwed. The currency is dead. The rest of Krugman’s analysis is then irrelevant.

      In that case you have a government unable to issue a fiat currency and unable to borrow. So you may have to start issuing a gold-backed or foreign-currency-backed or whatever currency, or use a foreign country’s currency, balance your budget based on actual foreign trade, raise taxes, and deal with it. This is a bad situation for the country, but if you’re Montenegro you may be stuck with it.

      The situation may be even worse; a government with this level of distrust may simply be non-viable. In that case, the new revolutionary government will likely be able to issue fiat currency.

  3. Greg Marquez

    Uhhh… I’d kind of expected that by this point someone would have pointed out the obvious: The U.S. Government doesn’t need bond markets or taxes for that mater to finance spending. The bond markets are an artifact of an earlier day when government currency was tied to gold. The government can “borrow” by, as it were, depositing a check in it’s Fed account.

    1. YankeeFrank

      Yeah I was wondering about that too. I also wonder whether the assertion Krugman makes in his post that printing money is more inflationary than printing money while issuing debt to match it. I guess the reason would be that the debt issuance and subsequent purchase by the private sector removes potential cash money from the buyers balance sheet, thereby offsetting the cash infusion of the money printing. Two things on that — one, this assumes that the money that was sitting on someone’s balance sheet (presumably some rich douche or a bank, hedge fund, pension fund etc.) would make it into circulation somehow in addition to the printed money, which is anything but a foregone conclusion. Two, printing money and funneling it through banks that are also buying bonds that offset that money is like rearranging the deck chairs to some extent.

      Putting printed money into the hands of those who would spend it would most likely not be in competition for goods and services with the money in the aforementioned rich douche’s account, so where would the inflation come from?

      On a related note the dreaded hyperinflation Krugman mentions seems extremely unlikely given the overabundance of goods for purchase in our society and the slackness of demand. There is so much ridiculous fear of inflation among economists its like the damned bogeyman or something.

      1. aet

        cash issued with bonds = obligated money
        cash issued without bonds = unobligated money

        Unobligated money is more inflationary than obligated oney.

        That appears to be the …hypothesis? Accepted wisdom? Past experience?

        Whichever it may be, the interest to be paid is a token of obligement. That’s important to governments, people being obliged to them.

        1. Nathanael

          Yep. This is the essentially wrong hypothesis made by Krugman.

          The key point here is that what matters is *circulating* money. To the extent that government bonds are bought with money which would otherwise buy something else, they are non-inflationary (don’t change circulating money); to the extent that they are bought with money which was just sitting, they are inflationary (change circulating money), because the government spends money from the borrowing.

          With money-printing, again, to the extent that the printed money gets spent on further stuff, it’s inflationary (circulating); to the extent that people just hoard it, it’s non-inflationary (non-circulating).

          Cash vs. bonds is not a big issue here. The only utility of bonds for a government is that by redeeming them the government can pull large amounts of money out of circulation very quickly — which is hard to do with taxation, which is the main method of redeeming money. This means that issuing bonds gives the government options for deflating bubbles (Paul Vollker style). Nothing more nothing less — that’s the only thing they’re good for.

  4. Steve Roberts

    “Why is Paul Krugman worrying about the US losing access to the bond market” Krugman can’t keep his arguments straight.
    a) he wanted the production of trillions of dollars to stimulate the economy and then had post after post giving proof the bond vigilantes didn’t exist so it was ok.
    b) he said at one point that we would return to normal growth rates with months of the stimulus and if you didn’t agree, you were anti-Obama. This weekend he said he knew from the beginning we wouldn’t return to normal growth rates quickly. Which is it?
    c) he was worried about the debt during the Bush administration but then didn’t worry about it for the first 2 years of Obama.
    d) he was in favor of entitlement reform until he opposed it.

    The guy can’t keep his own talking points straight anymore.

    1. Cahal

      a) Where is the contradiction here?

      b) He anticipated that the stimulus would be less of a wash than it actually was (see here: He and Stiglitz both criticised the actual bill relentlessly. He has also criticised Obama a lot, particularly recently.

      c) He was worried about running a war financed, tax cut for the rich financed deficit during a boom. He is not worried about short term deficits during a downturn to stimulate the economy. It’s really very simple.

      d) He is in favour of controlling costs sensibly, not butchering social programs. There is a difference.

      People really need to get over their Krugman fetish. It’s quite odd.

      1. attempter

        People really need to get over their Krugman fetish. It’s quite odd.

        Yes indeed. Why do you keep it up?

        “We need better elites!”

        But in Krugman’s case the record going back decades is clear and unequivocal. He’s a cadre of kleptocracy.

        Fer chrissakes, at least Warren still has some Rorschach qualities. But there’s no room left to “interpret” Krugman.

        How about Rocky Anderson? I have no idea who he is, and therefore he sounds great!

        1. Parker

          “But in Krugman’s case the record going back decades is clear and unequivocal. He’s a cadre of kleptocracy.”

          Baffling. Explain, please.

          1. attempter

            Here’s just one of my dozen-plus posts documenting K’s record.


            Beyond that just search my blog for “Paul Krugman”.

            For the real Krugman, look up his record as a globalization hawk under Clinton. This was, mind you, years after the full nature of globalization’s crimes, the structural adjustment assaults, etc. were fully known. Krugman aggrssively promoted these crimes, writing manifestoes with titles like “In Praise of Low Wages” (linked in several of my posts).

            Now you won’t be baffled anymore, assuming you were sincere in asking for that evidence.

      2. Philip Pilkington

        Are you suggesting that due to his ideological persuasion Krugman, a Nobel Prize winner, shouldn’t be held accountable for making cheap arguments?

        Krugman gets a lot wrong because he’s actually quite doctrinaire and scholastic in his views. Remember his claim that speculators weren’t pushing up commodity and food prices? And his ‘argument’ was a textbook supply-demand graph. It was weak. Krugman holds a lot of biases and he needs to be called on them.

        (Incidentally, on the speculation thing. Here’s part II of an interview released today with a CTFC commissioner on that very topic:

        1. Cahal

          You guys are honestly slightly insane, although I do love you.

          Krugman is, for the most part, on our side. He is trapped by economic theology but agrees with movies like IJ, reads NC regularly and gives a public platform to something other than right wing dogma. Calling him on his biases is good, but simply denouncing him as a supporter of kleptocracy is not constructive.

          1. Philip Pilkington

            Oh, well I’d never suggest that Krugman is just a shill for ‘The Man’. That’s an extraordinarily ignorant thing to say. Krugman is a voice in the dark as far as the media goes and I majorly respect that.

            (Although some say that he’s very ‘brave’ and that’s just nonsense. JK Galbraith once said that the most rewarding things — financially and publicity-wise — that he ever did were considered ‘brave’ by others).

            However, I do think he’s a pretty boring economist and just cites what he sees as truisms. He’s always getting caught with his pants down — on speculation, on Japan and now on MMT. He is — and I’m sorry to say it because he seems like a good guy — a bit lazy and a bit egotistical; mix that in with his pronounced scholasticism and you’ve got… well, you’ve got a boring academic.

          2. attempter

            “Extraordinary ignorance” – nope, you’re talking about yourself (or lying). See the link above to start your education.

            Here’s another one


            “voice in the dark”

            Ah yes, “we need better elites!” I saw somebody once admit he gives Krugman a pass because K used to be that voice in the dark pretending to oppose the Permanent War. But as we’ve known since 1/09 he actually only opposes criminal aggressive war when Republicans wage it.


            Calling a supporter of kleptocracy a supporter of kleptocracy “isn’t constructive”? Only in the eyes of a supporter of kleptocracy.

            Krugman supports globalization, supports the bailout, was shill #1 for the health racket bailout/austerity bill, explicitly advocated raising regressive taxes, flatly said Goldman Sachs is “bad for America” but nevertheless we have no choice but to live permanently under their thumb, explicitly denied we’re in a class war, explicitly denied that corporate power is an issue, and committed many, many other crimes in excess of what Streicher was hanged for (as a propagandist) at Nuremburg (look it up).

            He supports capitalism and the representative false democracy scam. He supports the two-party scam. He wages class war on the system’s behalf.

            Krugman is very aggressively against the side of democracy and the people. He’s very insidiously on the side of kleptocracy, and a pernicious astroturfer for it. He’s not on my side. Whether he’s on yours…

        2. Nathanael

          Unfortunately for your argument, Krugman is right about speculators not having a meaningful effect on food prices. He checked inventories.

          (Krugman actually *did* call out speculators for the oil price bubble in ’08… by checking inventories.)

          Nastily, the true cause of high food prices is global crop failures due to global warming, and there’s painful amounts of evidence to that effect (looked at the Russian and Australian crops lately?).

          Speculators are just amplifying that effect somewhat.

          Nobody much wants to talk about the true cause because it’s freaking scary — the fact that this is caused by global warming implies genuine food shortages are on their way worldwide, and are pretty much not going to be avoidable. The media has therefore been very very very quiet about this, even though if you pay attention you can spot all the crop failures due to “unusual weather”….

          1. Nathanael

            The article you cite does not seem to contain one single piece of evidence to disagree with my analysis.

            Speculation is merely riding on underlying events. The key graf:

            Not only does the world’s food supply have to contend with constricted supply and increased demand for real grain,

            Sure, speculators are causing trouble by exacerbating the price moves, but if we had increased supply and constricted demand, speculators would instead be selling the futures contracts short. There’s no such thing as having “only long products” in today’s regulatory environment; it’s trivial and legal to design a short.

            Admittedly, given the fact of global warming, what we *ought* to do is have world cooperation to redistribute food fairly — and instead we have speculators profiteering. And governments shouldn’t allow that.

            But the underlying cause is, most definitely, real shortages of supply. (Just as the underlying cause of oil price rises is peak oil.)

  5. ChrisPacific

    That is actually an interesting post by Krugman, even if he is succumbing to the fallacy of the excluded middle.

    I would be curious how MMT advocates would propose handling a high unemployment, high inflation situation (it has happened before). Another point that I think is neglected by MMT advocates is how to ensure that any spending by government is done in a way that actually boosts aggregate demand and reduces unemployment – as opposed to propping up zombie banks, or ensuring the continuation of bonus programs for senior financial sector executives.

    Currently we are in a deflationary environment so point #1 doesn’t apply, but I think point #2 continues to be a problem.

    1. John

      For the second point, it’s what you do and how you do it. For example, infrastructure spending hires people and purchases goods and services. An immediate exemption of (say) the first $30,000/year income from payroll taxes and an income “standard deduction” of also $30,000 from income taxes would put money into the middle class and working poor.

    2. Nathan Aschbacher

      When exactly did we have high demand-pull inflation with high unemployment? We had pretty bad cost-push inflation, which is caused by supply/price shocks to non-substitutable goods. The solution to that problem is to spend money to develop substitutable goods or find a way to increase supply.

      Additionally, how is this any different than the current situation? Under MMT you make sure the government spends money on useful things the same way you do it under the current regime.

        1. Philip Pilkington


          “The Depression of 1920–21 was an extremely sharp deflationary recession in the United States, shortly after the end of World War I. It lasted from January 1920 to July 1921. The extent of the deflation was not only large, but large relative to the accompanying decline in real product.”

          What happened in this period was roughly as follows:

          (1) Decommissioning took place as the war ended in 1918.

          (2) This led to a large unemployed civilian population as they were reintegrated into the civilian labour force.

          (3) At the same time there was still massive inflation as prices remained high due to a combination of war-spending and shortages of products (which went to the front). You can see this here: — note that the inflation rate goes up as the war kicks off.

          (4) As the economy began to readjust the high unemployment rate sent a massive deflationary shock through the economy and caused a depression as the inflation was wiped out.

          To say that this was a special case would be a vast understatement.

    3. Philip Pilkington

      “I would be curious how MMT advocates would propose handling a high unemployment, high inflation situation (it has happened before).”

      As pointed out above — and clarified by me — we’ve never really had a demand-pull inflation coupled with high unemployment. What happened in the 1970s was cost-push inflation. This was mainly due to oil prices. But then, since wages were indexed to the inflation rate, the cost of labour also rose exponentially (and hit the labour market hard).

      In these circumstances it’s difficult to do anything about inflation except fight against the indexing of wages or wait it out until oil prices drop. The alternative is wage-price controls. These are controversial, but I believe they work and I would advocate them. Don’t know if other MMTers would though.

      “Another point that I think is neglected by MMT advocates is how to ensure that any spending by government is done in a way that actually boosts aggregate demand and reduces unemployment – as opposed to propping up zombie banks, or ensuring the continuation of bonus programs for senior financial sector executives.”

      This isn’t neglected by MMTers.

      Targeted stimulus is key. That’s why we think the Jobs Guarantee program is the best solution.

  6. Linus Huber

    I also like these discussions but I am kind of a practical person who likes to put things into perspective that allow the average guy to understand it.

    Imagine that you are tight rope walking. You are young, light weight and agile. Well, you may be very successful. Now, imagine you are past middle age, overweight and feel your joints. It becomes very hard to be successful, probably it even becomes impossible.

    Similarly things work when you have little debt compared to a huge amount of debt. As heavier (more indebted you are) the more chances are that you will fail one of this days and fall to death.

    Loss of trust in a currency (hyperinflation) has nothing to do with inflation but is a political decision when all other options failed. Presently the FED manipulates public opinion about the value of the dollar dangerously. At one stage they will have to choose on which side of the rope they will fall, namely hyperinflation or deflation. As the FED would loose all power in case of hyperinflation, I guess that we first will see serious deflation.

  7. Nathan Aschbacher

    I don’t understand the basis of this argument at all. If you’re pursuing MMT structures and you still have the bond market, then you’re doing it wrong.

    The bond market is nothing but largesse to investors in sovereign debt for no reason but for the sake of providing them largesse. This has been the case since 1971.

    The bond market is an anachronism that’s based on gold-standard monetary mechanisms. One should have to establish why the bond market is even necessary or beneficial when operating an MMT framework. Is there some intrinsic value in providing all that largesse specifically via a yield curve?

    1. Adam2

      In other words the bond market is inflationary and printing money (or just keeping net financial assets sit in federal reserve accounts) is deflationary. Reserve accounts as net financial assets are a consequence of economic activity.

      1. Adam2

        I would like to amend this. The government spending is a inflationary as it would be with or without the bond market.

        It is as inflationary as what it is spending on.

    2. Nathanael

      There are two good arguments for the government “borrowing money”:

      (1) To provide a safe mechanism for ordinary people to save wealth. Post Office Savings Bank, US Savings Bonds. This, sadly, is not really being done any more by our corporatist overlords.

      (2) To provide a mechanism by which the government can suck liquidity out of the economy fast — quickly redeemable money. This is the main purpose for which the bonds are actually used. It’s totally irrelevant during a depression, but might be valuable during a bubble if the people managing the economy were actually willing to USE their ability to burst a bubble. Which they never are.

  8. MyLessThanPrimeBeef

    If you are for peace, you can’t be for MMM, sorry, MMT.

    Let’s say the Grand Duke of Fenwick keeps buying plastic toy stealth bomers from us on loans denominated in Fenwickian currency and instead of paying back, just issues more Fenwickian money. And we are forced to take that money and buy their government bonds, because, hey, what are you going with that money.

    I am pretty sure we will send the boys and girls to stop that nonsense and restore some sanity back to the Duchy’s external balance sector.

    But if the Grand Duchy can make a lot of real hypersonic stealth bombers themslves, their lenders might be very mad, but the lenders can’t do a thing…for a while.

    I understand that’s how the real world works with monetary imperialism. I just thought I cleared it up for those idealistic peaceniks who like to think themselves as progressives.

  9. bill n

    Very vaguely agreeing with @mendez above, here’s a suggestion for “for whatever reason”:

    Obama reveals tomorrow morning that overnight he read YS and Galbraith, and decided to to fix the Euro situation by buying all outstanding euro debt, roughly $14T, or 1 X US GDP, using seigniorage-created $ only.

    Galbraith would say cool, NP. Ron Paul would move to – er – ah – Switzerland? Etc. Krug. would say, see, we -are- Japan. The question is, what would the bond market say. More importantly, what would YS say?

    Anyway maybe we could survive the latter. But then tomorrow Obama buys up all the debt in the world, the other $30T or so. Galbraith would say cool.

    Krug. says that at some point bond vigilantes would in fact surface. I don’t think that’s assuming the outcome.

    In reality, I think Krug is saying, reasonably, that a few $T of stimulus is fine and some version of MMT, but mostly the confidence fairy, keeps the world from blowing up. But if you orgiastically embrace MMT, you are an idiot and you destroy the world (too).

    1. Because

      LOL. Why would Obama even bother buying up Europe debt when he could just let Europe collapse and instead put that 14 trillion into the US economy instead? Dude, like think before you post. Galbraith just spit up noodle soup.

      Ron Paul needs to go swiss and go with his Templer buddies. I bet Ron is still mad the masons wouldn’t allow him to join their frock afterall, his father was one.

  10. steelhead23

    Dear Edward, Pardon my sophomoric question: Didn’t Bernanke’s creation of money faster than GDP cause inflation? I note that food is up, fuel is up, cars are way up, about the only things going down are asset values and wages. Isn’t it a little bit true that viewing monetary policy as separate from political policy is dangerous? By dangerous, I mean ethically dangerous. Recall that in MMT, taxes soak up excess reserves. Yet, if we tax the daylights out of working folks, the rich banksters keep their reserves and the poor schmucks eat Alpo. Thus, good monetary policy is no panacea. What is needed is good monetary policy combined with good fiscal policy. Further, and a tad stupidly, isn’t it likely true that if we taxed the rich brutally and let wage earners keep almost all their earnings the economy would be better off because the goods the working stiffs would buy would keep more folks employed? That is, isn’t a dollar in a working man’s hands likely to have a higher velocity than a dollar in a rich man’s hands and thus, if we really wanted to prosper, we’d increase wages and increase taxes on the wealthy to pay for it?

    1. Because

      Bernanke hasn’t created any money at all. All he did was move excess reserves into the banks. Nothing more, nothing less. Essentially, he did nothing. It was a confidence fairytale right there.

      That is the point people CANNOT seem to get. Why the fascination with the Federal Reserve is beyond me. 1913-1980 nobody cared or knew what it was. Then comes St.Volcker and Friedman and we can’t stop hearing about that overrated half-political half-plutocratic body.

      1. Ellen1910

        I agree that Bernanke didn’t increase the money supply, but is it true to say that he “moved” excess reserves. After all reserves aren’t “moved”; the name of the owner of a reserve account (a particular bank) may change but all bank reserves are always sitting at the Fed.

        Better we might say he increased reserves and that by itself that action has no effect on the economy at all.

      2. Nathanael

        Absolutely right, Because. The key point here is that Bernanke shovelled money from the Fed’s account into the accounts of the megabanks. Except for the portion going on bonuses for bank executives, the “money” then just sat there.

        Money which isn’t being spent on actual goods and services is useless — it has zero economic value. It doesn’t really exist, if you see what I mean. For economic purposes, it is not really money if it’s not circulating. They talk of the “velocity of money” and the point is that the velocity of the money Bernanke gave to the banks is essentially *zero*. (Barring the amount being handed out to bank executives… and even that mostly just sits, too, only a little of it is spent on plane flights and caviar.)

        Had Bernanke actually printed large numbers of dollar bills and physically dropped them from helicopters in major cities, that probably would have helped the economy. But that’s not what he did.

  11. solo

    As reflected in today’s article and the previous one provided by Yves (defending Galbraith/criticizing Krugman), there is much confusion surrounding the question of MMT. Theoretical questions are glibly conflated, with no transition whatsoever, with references concerning today’s Fed news. But I wish to argue only one point: The MMT as presented is subject to a fatal equivocation on its own terms, which equivocation reveals that it is no “theory” in any scientific sense of the term. (1) On the one hand, printing money is a free ride; manna from heaven. In Yves’ words (from the previous article on MMT on this site, “Government can satisfy any commitment in that currency [fiat]if it so chooses . . . . no bonds necessary.” James K. Galbraith is notably profligate in such pronouncements, raising the embarrassing question, Why does anybody have to work at all? Why not just let the sovereign state make a “commitment” to feed us steaks and luxury cars, etc.? More soberly: If the gig is as simple as Galbraith/MMT claim, why haven’t our rulers wised up? After all, if the stickler is to maintain the income inequality that reigns, they could always just give the upper crust (themselves) more, and rationalize it with some sort of grandfather clause, or Noble Lie a la Plato, etc. (2) One the other hand, MMT advocates take away the golden goose when they add “fine print” to the effect that, well, the commitments that the government can “satisfy” are not, after all, unlimited, but limited by real resources (capacity utilization) and monetary contradictions (currency revulsion, inflation, etc.) These disclaimers are invariably stated vaguely; while providing no MMT curve, as it were, analogous to the Phillips Curve, for verification by the rest of us. (Incidentally: The thesis that government deficit spending “commitments” are salutary as long as idle capacity beckons is taken straight out of the Keynesian playbook; google “sticky wages Paul Samuelson” to verify this.) (3) In the upshot: We have a “theory” so vague and equivocal as to be scientifically unverifiable; hence not a scientific theory in any respectable sense. If I am correct in concluding that MMT is no scientific theory, the obvious corollary is that in MMT we behold yet another ideological motif in the political tendency known as bourgeois reformism, which claims that the evils of capitalism can be mitigated or done away with altogether while keeping intact the rule of capitalism as a system. (The reformists’ motto might be formulated as, This Time Is Different–you’ll hear a lot to this effect from the Obama advocates as the 2012 electoral farce approaches.)

    1. Ellen1910

      You’re being silly:

      1) Para. 1 is contradicted/canceled by para. 2 — if no one works there won’t be anything for the government to buy, and thus, no expansion of the money supply and no inflation.

      2) That Keynes came up with a similar idea doesn’t render either idea wrong.

      3) What economic theory is “scientifically [un]verifiable”?

      1. skippy

        Its not a ***tool*** problem, its a ***user*** problem and the user is high on metaphysical direct brain stem cortex injections.

        Skippy…David Eagleman: That is, the Germans have been busy showing us all the ways in which we do not know about things. Eagleman even goes them one better. His version of the unconscious drives 90% of human decision-making, the conscious playing a small role in affairs. In other words, we are driven by forces we do not understand. This is the naked gist of his new book Incognito. And at other times, he suggests that we simply don’t know about 90% of the universe, which means 90% of everything. With this epistemology and this kind of metaphysics, one could become nihilistic and despairing. Instead, Eagleman tells to be open to the possibilities and the alternate theories of scientific explanation, at least until the facts crowd out less likely hypotheses. This sounds like a very healthy agnosticism.

      2. solo

        @Ellen 1910: You say my para 1 contradicts my para 2; but my post was a single long para, so I presume you mean my items (1) and (2). –They indeed are inconsistent, but I was paraphrasing or quoting the MMT position(s). Thus my charge of equivocation–a term I suggest that you look up–which alone disqualifies a thesis as a scientific theory. Your second point–regarding my parenthetical aside, in which I noted one respect in which MMT was glossing the Keynesians (such as Samuelson, Krugman)–falsely imputes to me the claim that MMT’s borrowing made the MMT “wrong.” I said no such thing. I thought that the reference would be helpful regarding Krugman; also, as helping to deflate MMT claims to novelty. Your third point does not contest my conclusion that MMT, because demonstrably equivocal and vague, is unverifiable, hence no scientific theory; rather,an ideological motif of bourgeois reformism. Instead, you ask, What economic theory is scientifically verifiable? The immediate reply is easy: Any “theory” worthy of the appellation “scientific”; otherwise, you have the sort of “theory” epitomized in such as “Intelligent Design.” My second reply will require a little work on your part: By way of examples, I’ll name three scientific economic theories, the “scientific” criterion being whether each is verifiable/falsifiable. I hope that you google same to verify my claims. (i) Karl Marx theorized that capitalism needed unemployment, and provided his theory of (for google) “industrial reserve army,” or, “reserve army of labor.” This theory has been verified. (ii) David Ricardo, alleging the universal beneficence of free trade, the theory of “comparative advantage.” This theory has been falsified. (iii) Neoclassical economics, “capital theory,” “marginal theory of production”; falsified in the “Cambridge Capital Controversy.” Happy googling!

    2. Nathanael

      The details of MMT’s analysis of (a) currency revulsion / hyperinflation and (b) genuine resource limitations are documented in the literature.

      Basically they seem to agree with everyone else (apart from the magical infinite growth types) on genuine resource limitations. Very few economists bother to do actual resource-based economic analysis applicable to barter systems, rather than money-based analysis, sadly.

      On currency revulsion, MMTers seem to attribute it to essentially political, not economic actions. So, yes, the demented behavior of Bush and the general distrust of the government arising from the abandonment of the rule of law and unwillingness of the government to keep people fed and clothed — those can cause currency revulsion according to the MMT theories I’ve seen.

  12. anon

    If there’s never a “for whatever reason”, then the entire debate between Krugman and MMT is moot. Nothing else matters. Game, set, match. No discussion.

    But the premise is rather empty. How do you prove a failure to sell bonds can never happen? You can’t.

  13. attempter

    test: MMT, MMTer

    (I’m trying to find out if my MMT comments are now being systematically suppressed. This is now two days in a row. My one yesterday never did come out of moderation.)

    1. Philip Pilkington

      Nah, there was a problem with comments yesterday. I couldn’t post until I replaced my links with links.

  14. Philip Pilkington

    Krugman’s article was disingenuous.

    First he assumes that MMTers are all crazy dogmatists ala John Galt. This then allows him to make a crazy argument in which a government is running a substantial deficit amidst strong private sector demand. Would an MMTers advocate this? I can’t see why.

    He then reinforces this by arguing that we would begin issuing reserves instead of bonds as the yields went up (presumably in response to inflationary expectations — which, in such a circumstance, would be wholly justifiable). This would push interest rates down to 0.25% and lead to even more inflation.

    Why would MMTers advocate this? Because in Krugman’s rather silly mind MMTers are John Galt doctrinaire types. Not to be taken seriously. Krugman has a portrait in his mind of MMTers as quasi-religious loons who would pursue bizarre and destructive policies if they were given the chance. The problem with this portrait? Well, Krugman drew it himself, of course.

    1. JTFaraday

      “Krugman has a portrait in his mind of MMTers as quasi-religious loons who would pursue bizarre and destructive policies if they were given the chance.”

      The only loony thing here is that you assume that professorial types from UM-KC (seriously, UM-KC?) will get the chance. Krugman himself had to wrangle a dinner invite out of Bam in the pages of the NY Times.

      Any policy coming out of UM-KC will be immediately John Galted. So, when you push MMT, the John Galted version is what you’re pushing.

      The rest is academic.

      1. Philip Pilkington

        A few things.

        First, you missed the point. Krugman argued an ‘as if’ scenario in which certain bizarre policies were undertaken. We can only assume that he thinks that these are the policies MMTers would support. That was my point.

        Secondly, MMT policies have been used in real world political situations. In Argentina after the crash a jobs guarantee program was implemented with the help of UMKC economists. It was highly successful and has been studied in detail — particularly by Pavlina Tcherneva. See here:

        The Jefes job guarantee program was far from perfect as they got rid of it when the economy picked up — so it was never allowed to act as an automatic countercyclical mechanism.

        Recently they’ve launched a JG program in India as well. This is a different animal and has more to do with too rapid urbanisation than it does with full employment and price stability. But still, its there, it’s been done.

        Thirdly, there’s every chance that in the coming years governments across the world will have to implement MMTish policies. It appears to me that modern economies have to operate with increasingly massive budget deficits to remain stable and growing — the only alternative being huge asset bubbles that are extremely fragile and unstable. I think the political realities are soon going to change when this reality becomes ever more pressing. But that’s speculative, so we’ll have to see.

  15. joebhed

    Thanks, Edward, for bringing over the slightly maturing debate of Krugman v. MMT.
    So far only one commenter here seems to see the problem of K’s postulation vis-a-vis functional finance.
    The best we non-MMTers can hope for is an honest dialogue on the question put forward by K.
    I hopped over to BillyBlog to see if Dr. Mitchell had responded there. Not.
    I just hope he or JG or LRW can do so on this page in order to keep the dialogue that Ed Harrison has begun somewhat centered.

  16. djrichard

    In the case of a King merriyly spending (a la MMT) to the point where the population says “your money is no good here”. I guess there’s two outcomes: King requires money to be accepted at par (whatever that is decreed to be). Or King improves the value of his currency by draining liquidity by taxation. If the King loses his power to tax, then the jig is up. If he wants to keep on spending, he knows what he’ll have to do.

    The bigger question in all of this is how the banks make money off this. Their number one question will be how they can get in on the action by naked shorting (counterfeiting) the King’s currency. They’d be happy to get some inside information too on when the King wants to drain liquidity. It’s the banks as liquidity pump that are the real source of inflation, since they’ll leverage it up at 10X or more. In contrast to the King that is simply spending the money into the market without leverage. Or does the King not allow his currency to get naked shorted/counterfeited?

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