Philip Pilkington: A Point of Real Interest in the Latest Fed Minutes

By Philip Pilkington, a journalist and writer living in Dublin, Ireland

JK Galbraith, remarkably, regards the Federal Reserve as a largely powerless institution; he dismisses the idea that the Fed can end a recession by cutting interest rates as a “quasi-religious conviction” that “triumphs over conflicting experience.”… Because Galbraith believes monetary policy cannot increase demand, however, he has a sort of Depression-era vision of an economy in which anything that increases spending is good… And so Galbraith is oblivious to the most serious problem facing modern liberalism: reconciling social justice with full employment.

Paul Krugman

As the above, rather embarrassing quote from Paul Krugman’s review of JK Galbraith’s classic book The Affluent Society shows, neoclassical economists and neoclassically-trained central bankers have long been enamoured with monetary policy – and are generally angered when it subject to questioning. Why? Well, there are a variety of reasons, some of these are ideological (monetary policy doesn’t stink too badly of nasty government interference with the Holy Market), some of these are purely functional (the central bank has independent control over rates) and some simply have to do with making economists’ silly toy-models work (monetary policy gives neoclassicals a feeling of power over the economy they would otherwise lack).

Anyway, in the present crisis – just as in the great depression – monetary policy has proved completely ineffective. This has caused some – myself included – to question the real efficacy of monetary policy altogether, but it has others continuing the search for that silver bullet.

While Bernanke et al have been bungling through with hapless and ineffective quantitative easing policies and ‘operation twists’, commentators like Krugman – who cut his teeth getting Japan wrong for years – have come out in support of negative interest rate policies, which essentially means trying to provoke inflation that will cause real interest rates to be effectively negative. These are two sides of the same bad economic model, I’m afraid. They are both based on the same crappy engineering-diagram-cum-economic-model and they both steadfastly refuse to recognise the key lesson Keynes tried to teach us about capitalist economies: namely, that the whole thing is subject to an overarching indeterminacy that cannot be accounted for in a childish toy-model based on equilibrium analysis.

In fact, interest rate policy in the present environment is not simply worthless – it actually worsens the state of the economy to some degree. Why? Because of interest income channels. When the central bank lowers interest rates they assume that people will borrow more. And when Krugman says that we should have inflation outpace the interest rate, he is thinking along the same lines. What these folks never consider is the fact that low interest rates actually act as a net drain on new financial assets entering the economy.

If I’m a saver – and there are a LOT of savers out there these days – and the central bank lowers the interest rate or targets a negative real interest rate, I lose interest on my savings. This ‘interest income’ would have added to aggregate demand – that is, total spending power – as it would mean new net financial assets flowing into my bank account and encouraging me to consume more. Instead, my savings sit around idly earning nothing and so I have even less of an incentive to purchase goods and services.

The MMTers – especially Warren Mosler – have been pointing this out for years, but to no avail. But now the idea is starting to get play among the VSPs (Very Serious Persons). While most analysts focused on yawn-inducing speculation about the possibility of the Fed running a pointless QE3 program, some more nuanced analysts noticed something of actual interest in the recently leaked Fed minutes. Per the minutes:

It was noted that very low interest rates were negatively affecting pension funds and the profitability of the life insurance industry.

That is not much, of course, but at least it is something. It is, at the very least, a jumping-off point for those of us who are sceptical about the efficacy of monetary policy to get a foot in the door.

This is not so much a policy issue as it is a theoretical issue. Monetary policy acts for many analysts as a soporific, putting them to sleep when they should be focusing on real issues. It feeds nicely into their equilibrium models and allows them to sleep a little better at night. Even during the crisis their silly toy-models can yield them hours of fun as they tinker with them to produce higher inflation and lower interest rates. Meanwhile, Rome burns – and Keynes rolls in his grave.

Discussions like this can refocus policymakers’ interest in fiscal policy by showing that monetary policy is a bunch of watered-down hooey that is fickle and unpredictable in its effects. In that, we can try to exorcise the neoclassical demon as best we can and bring government policy back to where it was in the three decades after WWII. Here’s hoping.

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  1. Fiver

    Holy cow. I must be in the wrong place, as I could’ve sworn since I’ve been visiting NC that I’ve seen any number of admonitions, some very forceful, AGAINST those who view mass ‘easing’, in whatever form, as anything BUT the solution, and especially so in a lawless environment. In fact, that it’s been repeatedly argued for and pretty much assumed to be integral to any way out for the Eurozone (i.e., give the ECB orders to let ‘er rip as part of any “solution” proposed). What happened to those discussions of the Fed targeting an inflation rate, or nominal GDP? Glad to see I’m out of my mind.

    Meanwhile, “markets” are taking off again on Merkel’s full-court press for fiscal union, a “deal” of some sort by the “deadline”, all while NOT resorting to Eurobonds. Go figure.

    Here’s a piece from one of the jovial predators whose view for Europe is as dark as anyone’s at NC. His scenario is some defaults first, THEN print. Maybe, maybe not. It’s not like they’ve not had plenty of time to lay out the options. But whatever the mechanics, you can be absolutely sure the Wall Street/Washington complex has taken care of itself:

  2. Bill

    Isn’t the dogma of inflation from the Bernankites and Krugmanites supposed to be scaring us into getting our money out of the banks mattress and spend it ? Can you say NGDP ? I knew you could . The propaganda machine is churning full speed.

  3. Jerry Smith

    I’ve come to the right place! (via FT A’ville): “key lesson Keynes tried to teach us about capitalist economies: namely, that the whole thing is subject to an overarching indeterminacy that cannot be accounted for in a childish toy-model based on equilibrium analysis.”

    For me, this is the heart of the issue. The “Keynes for Dummies” approach – boost demand, play with monetary policy – ignores what caused this mess. A credit bubble, lax lending secured against pumped up asset values. The fact the UK or US are not “growing” at 2-3% a year, as the mess is cleared up, is not a surprise. Could Krugman & others (Ed Balls, Martin Wolf) start living in the real World. They could begin by actually reading some Keynes, not the ersatz version they were taught….just a thought.

    1. Dirk77

      If a little learning is a bad thing, then a lot of bad learning is even worse. The problem with a phd (or a masters) is that upon attaining it you have a vested interest in perpetuating what you learned as knowledge. What economist wants to tell him/herself that they would have made far more progress in understanding the world being stoned in Amsterdam than as a professor’s slave for five years? It takes a special person to do that and clearly the econmists brought in to tell polticians what they want to hear are almost all not that. Further, since the field is not a science they don’t have the tools to figure out when they are wrong. Only their innate common sense and fairness can help them here. Good luck.

  4. YankeeFrank

    Now I get why Krugman steadfastly refuses to see speculation-driven commodities bubbles — his faith in monetary policy precludes any possible negative consequences of “QE”; and all that money sloshing around at the banks MUST be having positive effects and CANNOT be causing excess speculation. Its sad when a man’s entire career is a sham and a fraud. If I was a neoclassical economist (well, I wouldn’t be as I have a weakness for the truth) I would seriously consider blowing my brains out right now. After all the theft and economic destruction they have sown, what else is there for them to do? Of course, instead, they will prevaricate and build higher and higher piles of bullshit rather than face the truth. Has the modern world ever seen an (almost) entire profession with such a complete lack of integrity?

    Professionals working in important fields like law, medicine, accounting and economics should be required to take a vow of poverty, or at least a vow not to earn more than, say double the median income for their region. Otherwise it ceases to be a real profession and morphs into corrupted counsel in exchange for money. The professions in our society have become corrupted, and are bringing down the entire edifice with their complete lack of honesty and integrity.

    Wikipedia’s definition for “profession”: A profession is a vocation founded upon specialized educational training, the purpose of which is to supply disinterested counsel and service to others, for a direct and definite compensation, wholly apart from expectation of other business gain.

    Btw, I like “silly toy-models”. Heh.

    1. Fiver


      You are SO right re Krugman. And SO, SO right re the “professionals” who’ve turned their themselves into whores.

  5. Chris Cook

    If by ‘saving’ you mean paying off debt, then yes there are a LOT of savers out there.

    But if you mean investing then you are completely wrong.

    >90% of the populations affected by the Anglo Disease (eg US and UK in particular) are insolvent, illiquid, or both, with their only ‘savings’ being houses inflated to a price level at which the purchasing power does not exist to buy them.

    The savings of the few are the debt of the many, and this outcome is – as many have pointed out – the result of a 30 year hidden recession where the fruits of massive productivity increases has gone to capital rather than labour, who made up for it by borrowing against inflated land prices.

    The evidence is the secular decline in retail deposits and the growth of the wholesale market which gave us the Northern Rock in the UK.

    We also see hedge funds, money market funds and in recent times the new breed of risk averse ‘inflation hedging’ funds which have actually caused (it’s not greedy speculators intent on transaction profit – these funds are the precise opposite in that they aim to avoid loss) the very inflation they aim to avoid.

    You couldn’t make it up.

    Absent radical fiscal action, the next phase in the ongoing car crash will IMHO be a collapse of the current commodity price bubble, and general debt deflation and depression.

    1. Philip Pilkington

      “If by ‘saving’ you mean paying off debt, then yes there are a LOT of savers out there.

      But if you mean investing then you are completely wrong.”

      I don’t mean ‘investing’. There are lots of people sitting on cash and t-bills right now. Krugman knows this and he calls it a ‘liquidity trap’. He thinks that by lowering real interest rates they’ll be forced to invest. I hold that they won’t and lowering real interest rates will simply lower their savings which, in turn, will lower aggregate demand and make the whole situation worse.

      1. Blissex

        Sure lots of people who have money on the sidelines are looking to invest into risky activities given that low risk returns are pretty bad. Anyhow “families” are largely net debtors, as another commenter points out, and net creditors are mostly only older women and pensions funds. Pension funds are the only ones that are looking for yield, because their managers are paid by benchmark, and return on capital is valued by them more than return of capital.

        So the great pool of pension fund cash on the sidelines is largely the one looking for returns by way of real or financial investment. They mostly however invest in USA stocks, and USA businesses already have lots of cash.

        But even if pension fund and business cash gets mobilized, unfortunately just about every injection of money in the past 30 years has resulted in more investment in two things:

        * Job generation in China and India, because planting a factory or an office there gives better returns than in the USA, because the USA is low-growth/high-cost and China and India are high-growth/low-cost, and one can easily export whatever goods and services from there to the USA.

        * Asset price increases fueled by leveraged purchases in the USA, delivering low-tax or no-tax capital gains to property owners, and a stronger dollar which makes exporting jobs to and importing from China and India both cheaper.

        I suspect that Krugman and others badly want a new asset price bubble, as they know very well that a job boom in the USA is rather improbable because of political reasons:

        * Obama is almost certain to lose re-election because he is being blamed for the feel-bad consequences to the (quite deliberately targeted to achieve that I think) policies of the previous administration.

        * Supporting spending or investing money in the USA to boost USA jobs can only be done via fiscal means, because money knows no frontier, but government purchase orders can be targeted. But the fiscal lever is controlled by the Republicans who of course want to make sure that Obama does not get re-elected.

        * Other than targeted spending in the USA to generate USA jobs, only giving house and 401k owners a new round of tax-free capital gains might generate the feel-good that would give Obama a chance to be re-elected.

        Therefore the constant advocacy of monetary-policy based asset price inflation and the not so veiled threats by the Republicans leadership against the Fed if they don’t undermine Obama’s chances of re-election by keeping the economy in recession.

      2. Blissex

        Oops I forgot another large category of net creditor that would benefit if interest rates were higher: foreigners.

        But of course just like everybody else who is a net creditor more interest come for them would not mean more job-creating spending or investment in the USA.

        Even worse, higher interest rates might mean more foreign capital flowing into the USA, driving the dollar even higher.

        Overall I think that in the current situation low interest rates are the best of a bad lot, even if there is no chance of those generating investment in job-producing activities in the USA (except perhaps building more unsellable houses to support a renewal of the housing bubble).

        I am also skeptical that near-zero interest rates will generate a new asset-price bubblesoon enough to get Obama re-elected, but ironically the new asset price bubble might happen somewhat later and give a huge boost to the popularity of President Romney or President Gingrich.

        The real culprits here are as usual USA voters:

        * For being insatiably greedy of no-tax or low-tax capital gains to make money fast at any cost (to someone else).

        * For not caring about policy lags, and blaming Obama for the jack-in-box-horrors left him by Bush (probably deliberately).

        1. Blissex

          «USA voters:

          * For being insatiably greedy of no-tax or low-tax capital gains to make money fast at any cost (to someone else).»

          A pithy summary that just occurred to me is that most USA (and UK, …) voters wished “I want mine! F*ck everybody else…” and both wishes came true, precisely in that order.

        2. Fiver

          Obama has actually done more damage than Bush, as he DID NOT kneecap Wall Street when he had the chance. He will be re-elected with a comfortable margin. Wall Street loves him, and Republicans didn’t even bother to look for a SERIOUS contender to challenge him.

    2. Blissex

      «the result of a 30 year hidden recession where the fruits of massive productivity increases has gone to capital rather than labour, who made up for it by borrowing against inflated land prices.»

      I used to think like that but I am now skeptical that there have been productivity increases, never mind massive ones.

      There are some arguments against massive productivity increases.

      The first is bottom-up: where should they have happened? In which sector? The USA (and the UK…) have massively de-industrialized, which the main drivers of new employment have been services like health, education, finance, law. It is rather hard for me to believe that there have been widespread productivity increases in those sectors. There have been labor-saving productivity increases in retail and logistics, but it is hard for me to imagine other sectors delivering that much.

      The second is top-down: productivity is measured either in dollars or in inputs. For example productivity of labor can be measured in cost per value of output or in hours per unit of output or some combination, and all give different productivities. Let’s take GDP divided by hours worked as an aggregate measure of productivity. There is an increase, but it crucially depends on real GDP having increased faster than hours worked. Well there are reasons to reckon that real GDP growth has been overstated: “inflation” of things other than gadgets has been pretty high on one side, and on the other GDP has been “drugged” by apocalyptic debt growth as you report, and this graph makes clear:

      If real GDP has not been growing that fast where from has the enormous wealth captured by the elites come?

      Well, I have started to think, looking at the chart above of debt-GDP ratio, that it looks like the debt of a business after a leveraged buyout (LBO): the new owners of the business get it to take on a lot of debt to pay themselves huge dividends, and squeeze it dry of cash flow by under-depreciating assets and downsizing the workforce and outsourcing what can be outsourced to cheaper contractors even if this hollows out the enterprise value of the business.

      Which is more or less a description of the whole USA economy in the past 30 years since Reagan in 1980, and in particular since Gingrich in 1995.

      Put another way if we look at the USA economy of the past 30 years from a corporate finance perspective, it looks like it was identified as a cash cow about to turn into a dog in the Bain matrix and as if an LBO then was organized to milk its cash flow milked and strip its assets as hard as possible thanks to pump-and-dump asset bubbles, with Greenspan and Goldman-Sachs in the role of Drexel and supporting friends.

      Whether this has been done as a coordinated plan by an LBO team or not does not matter; it could have been an emergent countrywide scenario from the many localized asset stripping LBOs that have happened.

  6. nickj

    “childish toy-model” – you have a better one i presume?

    The tone of this article makes me suspicious: too much abuse, not enough analysis.

    In addition, as noted above, you misreprent krugman’s point on inflation.

    1. Philip Pilkington

      “The tone of this article makes me suspicious: too much abuse, not enough analysis.”

      You get what you give. Read Krugman’s ‘review’ — read: stitch-up — of Galbraith.

      “In addition, as noted above, you misreprent krugman’s point on inflation.”

      I don’t see this anywhere. Care to point out how I misrepresent his point? He’s for inflation targeting through lowering interest rates and accelerating the inflation rate.

      1. nickj

        You say:”When the central bank lowers interest rates they assume that people will borrow more. And when Krugman says that we should have inflation outpace the interest rate, he is thinking along the same lines.”

        My understanding is that Krugman’s point is that increasing inflation (or expectations of inflation) will induce savers to spend, thereby increasing demand.

        My wider point is that NC is going all usenet-ish which I see as unfortunate; if it continues that way I’m off. There is way too much name calling and general playground mouthing off going on.

        1. Philip Pilkington

          Presumably it would do a number of things (in Krugman’s mind). Increase saver’s spending. Increase saver’s investing. Increase private sector borrowing (both consumption borrowing and investment borrowing).

          He’s wrong on all points. It just decreases interest income.

          And I can hardly remember a time when NC didn’t rip on theoclassicals… Krugman ripped on Galbraith — just as he rips on the MMTers — and his criticisms look unpolished today.

          1. Mike Sax

            To really judge Krugman’s quote about Galbraith I’d have to see the full review and am interested when it was written too. Until then I’m not going to damn him to the heavens. But to call him a neoclassical takes some license.

            I really don’t see what anti-inflationists possibly have to offer us right now. If you raised interest rates that would be nuts quite honestly. The ECB has done it several times this year so you don’t just have to speculate about the effect.

            It would be nice to get a little more in your savings account interest but meanwhile economic activity would slow to a crawl and no one would invest. There’s just no case to make for tightening during a recession.

            What can I tell you? There are Keynseians who claim that monetary policy has no effect and monetarists who claim it is everything. My view like Eggertsson-and Krugma, Delong, etc.-both fiscal and monetary policy have a part to play.

    2. chad

      ““childish toy-model” – you have a better one i presume?”

      This line of thought has been gnawing at me for a while. Just because you don’t have an accurate model doesn’t mean you’re excused in using one that’s broke.

      Also, If someone points out that a particular model is broke and doesn’t work and they turn out to be right then that model has to be abandoned whether or not there’s an accurate replacement available. Broke is broke.

      you cannot rely on inaccurate broken models when livelihoods are on the line. period.

      1. Philip Pilkington

        It’s a pathetic argument. Imagine if the physicists simply ignored the recent experiments that may disprove the theory of relativity simply because no other theory exists.

        It is in these statements that one can see the neoclassical economist for what they truly are: a conjurer of nonsense and lies.

        1. john

          Alternatives to toys: Wynne Godley’s Monetary Economics from 2007 seems to me a decent placeholder until Wray and Mitchell get their text book projects complete. Someone in a comments thread here sent me to it back in 2009 and it made what’s been going on since relatively easy to understand.

          1. Philip Pilkington

            Yes. Ten thumbs up. I’m still waiting for the paperback. But Godley et al are more focused on accounting than on models. The argument above is more so based on accounting than anything else. So, in that sense it is Godleyian.

          2. Tom Lines

            Godley and his team at Cambridge were the only ones who came close to forecasting the depth of the ‘Thatcher’ recession in the UK in the early 1980s. For that piece of wisdom they were rewarded with the loss of their government grant, and they soon disbanded…

    1. Philip Pilkington

      Yes, I know. This is a draft of the article. Yves accidentally published the wrong one. I’ve emailed her to fix this and put up the later draft.

      The later draft contains more ‘abuse’ heaped at Krugman. Which I’m sure you’ll appreciate.


      1. Dan_in_KC

        “..The later draft contains more ‘abuse’ heaped at Krugman. Which I’m sure you’ll appreciate.

        Oh great – with this kind of snarky wink-wink professionalism I’ve been given one more reason not to read articles from this author.

        That and this jewel in one of the replies:

        “I don’t mean ‘investing’. There are lots of people sitting on cash and t-bills right now. Krugman knows this and he calls it a ‘liquidity trap’. He thinks that by lowering real interest rates they’ll be forced to invest. I hold that they won’t and lowering real interest rates will simply lower their savings which, in turn, will lower aggregate demand and make the whole situation worse.”

        And what exactly does ‘lower their savings” lead to? (LESS demand?? really – it might not be called ‘investing’ but sounds more like ‘increasing their spending’ to me which is exactly the intent. The contradictions in the views held here are staggering and reflect an approach more informed by animosity toward specific economists than on analysis.

        1. Philip Pilkington

          Did you read the piece at all? I’ll go slowly.

          If people hold savings and they do not want to invest because of low aggregate demand, lowering interest rates will NOT increase investment.

          Now, if this is the case then any lowering of interest rate will mean less interest accumulated on their savings. With me so far? That means that their propensity to consume should fall together with the falls in their interest income.

          Now, this lowered propensity to consume will result in lower aggregate demand. And this, in turn, will reinforce the problems with investment already there.

          I swear, to get through the fog implanted in people’s brains by the toy models takes some work.

          P.S. If you don’t like snarky commentary, stop defending Krugman. He constantly engages in this. The ‘review’ of Galbraith linked to above is replete with ‘snarky commentary’ as are his blog posts. I think it’s funny, but if you don’t you should stop defending him.

          1. Dan_in_KC

            “..Now, if this is the case then any lowering of interest rate will mean less interest accumulated on their savings. With me so far? That means that their propensity to consume should fall together with the falls in their interest income…”

            Maybe in a world where a large fraction of a person’s disposable income is provided by ‘interest’ on their savings then you might be right – but show me where that truly applies for the broad swath of the public. Your arguments are diddling around the edges of a problem and the marginal gains (or losses) in aggregate demand by toying around with the earnings from interest on savings will go nowhere towards solving the larger problem.

            And you can read the above again as s l o w l y as you like but I doubt you will ‘get it’.

          2. Philip Pilkington

            Well, now you’ve changed your argument. Now, you say that I’m just honing in on minutiae. But that’s the point of the article — which, again I assume, you didn’t read properly. I’ll again quote the conclusion — remember: read it slowly:

            “This is not so much a policy issue as it is a theoretical issue. Monetary policy acts for many analysts as a soporific, putting them to sleep when they should be focusing on real issues. It feeds nicely into their equilibrium models and allows them to sleep a little better at night. Even during the crisis their silly toy-models can yield them hours of fun as they tinker with them to produce higher inflation and lower interest rates. Meanwhile, Rome burns – and Keynes rolls in his grave.

            Discussions like this can refocus policymakers’ interest in fiscal policy by showing that monetary policy is a bunch of watered-down hooey that is fickle and unpredictable in its effects. In that, we can try to exorcise the neoclassical demon as best we can and bring government policy back to where it was in the three decades after WWII. Here’s hoping.”

            You see? It’s a broad THEORETICAL point, not simply a POLICY point. (The policy implications of interest income are marginal — but, AS I POINT OUT IN THE ARTICLE, they might hone in policymaker’s attention ala the recent Fed minutes).

            This is why I go after Krugman etc. Because this is a chance to move the debate away from monetary policy altogether (hence, the Galbraith quote).

            Either you didn’t read the article properly; you’re a Krugman fanboy or you don’t get an argument that is ever so slightly subtle.

          3. Anonymous Jones

            This is just completely down the rabbit hole.

            You’ve embarrassed yourself with the post. You’re now postulating in the comments that people who disagree with you are “fanboys”.

            You do not seem to have a very good grasp on the subject matter, either monetary policy or Krugman’s position on it.

            Your hubris is overwhelmingly misplaced. It is just nothing but embarrassing. You do not have all the answers about how the economy works. To write something so idiotic as “monetary policy has proved completely ineffective.” Um, I can assure you (assure you!) that there is no such thing as “proof” of this. Did you run control studies in alternate universes where monetary actions were not tried by the Fed? This is the height of delusion. You have no idea what would have happened without Bernanke’s policies. You know so much less than you think you do, it is just stunning to read the confidence you have. But that’s the thing with most people and overconfidence. It’s fed by the very limited intellectual apparatus that prevents new ideas from penetrating one’s mind (strong resistance to cognitive dissonance in this one) and leads one to think one’s ideas must be correct.

            Krugman clearly, over and over again, has said that while monetary policy may have very little effect in many cases, it is not completely ineffective and must at least be tried. There are many instances where it seems monetary policy has a profound effect. Liquidity trap times do not, as he has admitted, appear to be one of them. There is nothing in the quote above that is embarrassing to Krugman (though he, and many other people (you and me included!), have said things at one point in their lives and then later with more facts and experience have concluded “oh, you know what, I was wrong about that”).

            Just dial it a back a little. It’s not like you have nothing to say. You just say it is such a foolishly arrogant and overconfident manner that it drowns out any good you might perpetrate.

            Fanboys indeed.

          4. Philip Pilkington

            I’m not even sure why I’m responding to this… but anyway…

            “To write something so idiotic as “monetary policy has proved completely ineffective.” Um, I can assure you (assure you!) that there is no such thing as “proof” of this.”

            In economics — as in all policy — we do have to have some sort of criteria regarding whether something works or not. Can we tell of exact cause and effect? No. But you can’t do that in any science, especially any social science — just ask David Hume. However, we can look at empirical examples and conclude from there.

            In this case we have a number of experiments for monetary policy’s ineffectivity during times of debt deflation: Japan post-1991; US post-2008; UK post-2008; US post-1929… the list goes on. Every time we see monetary policy being ineffective.

            Then there’s the question as to whether monetary policy is effective in ANY major recession. I agree with Minsky et al that it is not. If you look carefully at, say, the 1973-74 recession it was fiscal policy that stabalised the economy (see chapter 2 of ‘Stabalizing an Unstable Economy’).

            But I don’t think any of that matters. I think you just wanted to pick out some easy methodological point about proof or some other nonsense so you could have a go at me. You’ve done this before. It’s boring.

            Do you really want me to qualify my statements with “While I cannot say for certain that monetary policy doesn’t work in debt deflations, it is my considered opinion that…”? I doubt it. I think you’re just having a go. As usual.

      2. nickj

        You win. I shan’t bother reading it I’ve got better things to do, like reading Steve Keen’s book, than piss about on the internet.

        1. Dan_In_KC

          I concur with you (but hesitate to all it a ‘win’) – when the only recourse for the author to resort to when pushed back is to call that person a “Krugman Fan Boy” then it is clear their points are not based on actual data but are driven from emotions…not worthy of further discussion.

  7. Phil

    nickj. They’re toy models because they assume that the economy is in equilibrium (or very close to it) and they ignore the time-value effects of debt and credit (it’s a foundational assumption of most neo-classical economics that because every debt is someone else’s credit, “debt doesn’t matter” in macro terms).

    The social sciences are often accused of having “physics envy”: neo-classical economics has a bizarre obsession with the static physics of the nineteenth century. It might be nice if they actually tried to incorporate the research into dynamic systems from the last 150 years or so into their models…

    1. Philip Pilkington

      Precisely. I have a piece going up on this point and its relation to Krugman hopefully next week.

    2. Blissex

      Sure there was physics envy, as the 19th century overarching metaphor was Laplacian dynamics, as nowadays it is computing.

      But you mistake the direction of causality: neoclassical (theoclassical) economics uses a physics metaphor to lend credibility to a purely propagandistic exercise.

      The central truthiness of neoclassical economics, to which everything else is subordinated, is that the distribution of income is a mathematical consequence of perfect equilibrium, and any other distribution of income brings the system to a worse equilibrium or to no equilibrium.

      In order to support the central truthiness of Economics the general equilibrium model has been “shaped” shamelessly, and the core Arrow-Debreu-Lucas model has been “enriched” with crass mathematical mistakes and economic inconsistencies (documented for example with remarkable patience by Steve Keen) that are crucial to support that truthiness.

      A clever political economist called Sraffa did many decades ago as an exercise a mathematically correct and economically consistent model of neoclassical economics, and it has multiple equilibria and multiple distributions of income, and which one happens is essentially arbitrary.

      It is largely a curiosity, because neoclassical economics as a whole is substantially worthless (as the Cambridge Capital Controversy so brightly showed 50 years ago) except for propaganda purposes.

  8. UnBeliever

    See the Steven Keen interviews recently here on NC. The problem is larger than Gailbraith vs Krugman misinterpreting Keynes, the whole notion of equilibrium is bollocks, maintained in absurd denial of the evidence.

    1. Tom Lines

      The (Newtonian) physics envy goes back to Adam Smith, as does the notion of equilibrium – in Smith’s vacuous idea of the ‘natural’ price of a product. Before we can make progress with this, we have to dethrone the demigod Smith and treat him like any other thinker – interesting and original, but also fallible and very much a man of his times.

  9. Pat

    I’m not sure what the point of this article is, if it has one at all, other than to bash Krugman and his kind of economists.

    PP suggests that the Fed is finally waking up to the negative consequences of low interest rates: “It was noted that very low interest rates were negatively affecting pension funds and the profitability of the life insurance industry”

    Actually, the Market Gods are taking a very crude Skinnerian behavorist approach to the economy when they keep interest rates low. They want regular folks to stop saving or keeping their money in money market accounts or buying bonds, where they get negligible benefit. Instead, the Market want folks to put their money into potentially higher-earning places, namely, the stock market or real estate. The stock market is a giant Ponzi scheme that constantly needs more suckers, more new money. New inputs allow the market to stay afloat (when the real value of stocks is really one-half to one-third of its present nominal value), lets old investors cash out, increases consumer confidence, and lets the Big Brokers make easy profits by skimming at least 10-20% off the top.

    1. Philip Pilkington

      The point is that it doesn’t work. People are piling into treasuries — and Krugman and the rest of the pseudo-Keynesians know this.

      So, all the low rates are doing — and all the negative real interest rates would do — is extract interest income from people. This lowers their propensity to consumer and worsens the problem with aggregate demand.

      1. EMichael

        I would be interested in your thoughts on how many of those “piling into treasuries” have their consumption affected by low yields in light of the concentration of such wealth in the hands of a comparitively small group and the majority of the treasuries held by the commons are not accessible.

        I’m thinking Paris Hilton has not changed her lifestyle because of low treasury yields. And most of the treasuries held by those outside the Top 5% are in accounts they cannot access until retirement.

        1. Philip Pilkington

          I reckon it does shift rich peoples’ propensity to consume. As Keynes argues in the General Theory, there is a strong psychological factor in peoples’ propensity to consume. In the case of a worker they will stop consuming, usually, when their paycheck shrinks. In the case of a rich person I think psychological factors play a large role. So, yes, I think seeing their savings/investments accumulating low rates of interest might affect their propensity to consume quite acutely.

          Also, there’s the pensioners. Look at the comment below. When 401ks etc lose interest income that does translate into shrinking paychecks. And then there’s insurance companies raising their premiums because of declining profits. That definitely eats into consumer spending power among workers.

          So, while the effects aren’t game-changing, I’d be reluctant to say that they’re irrelevant.

          1. EMichael

            I would tend to think it is much closer to irrelevant than yourself. And doubt either of us could prove our case.

            However, considering that half of US “pensioners” have no income from such instruments; and most of the wealth is concentrtated in the hands of people who, with all due respect to Keynes’ “strong psychological factor in peoples’ propensity to consume”, would barely notice if treasuries were spitting out three or four times as much interest as they are, I think it is closer to irrelevant.

          2. Philip Pilkington

            Well, as far as pensioners go… there’s always the other half.

            As for rich folks, in my experience they’re very sensitive to low-yielding investments. Most rich people have their whole Being tied to their bank accounts and when these aren’t yielding well a general sense of paralysis and pessimism takes them over. This, of course, is unrealistic to the point of being hysterical, but I really do think it affects their spending quite significantly.

      2. farm manager

        Millions of “People are pouring” money into food, gas to get to poor and shakey jobs on, rent and rat-hole house payments…..actually which are more of a rent than rent is once you are under H20.

        PP and his posse here are observing and considering the world of financialization of money made money. Which has become the equivilant of stirring air. There never was anything where it is presume that there is something. Ever try to buy something by simply telling the cleark you had a sufficient account balance? In there world, if there is a collapse, the oxygen shuts off. It won’t. It’ll just stink and find them with no resources to stop it, so it’s understandable that their efforts must go to sustaining the charade. But then they should confess to that. If it’s your job to be an apologist for the Very Serious People, then stop trying to dress yourself as some psuedo-populist looking after the sustainability of welfare of anything, or anybody.

        The monetarists at least view the former plane as somewhere to be considered. The traders here see it as a faceless blob. A column, or a paragraph.

  10. joebhed

    That monetary policy is, must be, ineffective as a tool for promoting growth in the aggregate demand that is now needed to turn around the economy is a given.
    We are already in the debt-deflation phase of the great asset bubble ‘business-cycle’.
    But it doesn’t NEED to be.

    The discussion of the ineffectiveness of monetary policy initiatives deserves more than this kind of jingoistic econ-speak.
    If ALL of the initiatives of ZIRP and QEs and direct bailouts cannot resolve the debt-deflation imperative of this failing money system, then what can?

    Most MMTers call for initiation of new policy initiatives – primarily those that directly increase the money supply through non-debt funded government expenditures aimed at increasing aggregate demand.
    If you neither tax nor debt-fund government initiatives, and actually pay for them via the government’s money-creation powers, then you automatically increase the money supply, reversing the effects of our debt-saturation driven deflation.
    The ancillary, and for reason unspoken, benefit of this action is that unlike ALL traditional debt-based money creation, this money never gets destroyed by paying off a debt, which requires another debt or yet deeper debt-deflation.

    I’m not an MMTer and often argue against its premises.
    But this article exemplifies the narrowness of the monetary policy debate in this country, one where we remain incapable of understanding that the deepest root of the problems manifesting in the pain, suffering and resulting occupations is NOT in the policy initiative arena, it is in the debt-based system of money that we live under.

    As soon as we can begin the discussion of whether and how to have money without debt, we will begin the long walk out of this policy-tinged despair.

  11. Eleanor

    I certainly respond positively to this essay. A lot of people are in debt, yes, but there are still 401ks and people with other investments that vary from modest to considerable. After the several stock market crashes in recent years and the collapse of the real estate market, it’s hard to see what to invest in — except paper backed by the US government. But the interest rates are 1-2% or less. If they were 8%, as they were for much of my adult life, I would be a much happier retiree, and I would be spending more money.

    1. Philip Pilkington

      Exactly. But people like Krugman will strike a liberal pose on this one. They’ll claim that they’re trying to get the rich to do what they’re supposed to do; that is, invest. But the real implications of their policies are:

      (a) Less aggregate demand from truly rich savers.

      (b) Less aggregate demand from pensioners and other not-so-rich savers.

      (c) Declining profitability for the insurance industry who then pass on the costs to the consumer in the form of higher insurance.

      1. Eleanor

        We didn’t add in the psychological effect, which we saw during the real estate boom. If people see investments increasing in value, they feel more confident about spending money. The confidence fairy appears when people see the possiblity of more income, not less.

        And aside from the insurance companies getting insufficent returns from their investments, there is also the problem of pension funds, which either have to invest dangerously or get returns far lower than they need. The insurance companies will increase prices; the pension funds will return payments; in both cases, there will be less spending money in the economy.

        I went through the stagflation period during Carter with no trouble. My modest savings made nice interest, and I can’t remember being bothered by increased prices. How you react to inflation depends on what kind of income and debt you have. Inflation — especially a resonable amount of inflation, say the 3-4% that used to be assumed normal — is not always such a bad deal.

        I can understand the greed of bankers, though it assumes that nothing will really change, and they and their money will be safe. But I don’t understand the people running governments and economies. Do they have no idea how dangerous the situation is?

        1. Eleanor

          I will add that I am hampered in understanding modern economics because my training is in accounting.

  12. Max424

    If I stuff free/money into the pockets of a criminal knowing he will use the free/money to commit more crimes; haven’t I too committed a crime?

    Also, if I stuff free/money into the pockets of a criminal knowing he will use the free/money to commit crimes more damaging to this nation than 10,000 al-Qaeda cells could ever dream of achieving; haven’t I then, committed treason?

    1. LeonovaBalletRusse

      Thank you, Max424. Our Constitution provides the penalty for those who commit treason: “to be hanged by the neck until dead.” Our founders took treason very seriously, and they anticipated its occurrence, hence the penalty.

      Likewise did they give *We the People* the RIGHT, nay the DUTY, to overthrow tyrannical government. Our “three separate branches” of government have been occupied by tyrants and their agents of destruction. These are traitors to our constitutional government *of, by, and for the People*, according to the Rule of Law. They have occupied our government through confiscatory *Financial Lebensraum*, and a concommitant re-writing of our laws: acts of treason.

      The question is: How must we exercise that RIGHT, do our DUTY, so as to succeed in the effort to restore our constitutional government? Is our foe more powerful than was The British Empire when George Washington and our other Founders seized the day for *freedom from tyranny*?

      Consider: “TOP SECRET AMERICA: The Rise of the New American Security State” by Dana Priest and William M. Arkin (New York, Boston; Little, Brown and Company, 2011).

      Will the worker bees and captains of the Security State dare to declare and carry out *MUTINY* against their treacherous tyrannical bosses–joining in common cause with *We the People*? Against what common *enemy*?

      Little, Brown and Company published a book in June, 1932 that shows the enemy then: “THE [A] BUBBLE THAT BROKE THE WORLD” by Garet Garrett — conveniently available at:

      A SET of books tells the complex development of our enemy:
      “CONJURING HITLER: How Britain and America made the Third Reich: by Guido Giacomo Preparata;
      “A CENTURY OF WAR: Anglo-American Oil Politics and the New World Order” – New Edition – by F. William Engdahl;
      “UNHOLY TRINITY: The Vatican, the Nazis, and the Swiss Banks” by Mark Aarons and John Loftus;
      “AMERICAN DYNASTY: Aristocracy, Fortune, and the Politics of Deceit in the House of Bush” by Kevin Phillips;
      “THE SECRET WAR AGAINST THE JEWS: How Western Espionage Betrayed the Jewish People” by John Loftus and Mark Aarons;
      “THE IDEOLOGY OF TYRANNY: Bataille, Foucault and the Postmodern Corruption of Political Dissent” by Guido Giacomo Preparata;

      Three *American* Names, in light and shadow, run through this saga of planned, ruthless destruction for profit as a *leitmotif*: Bush; Rockefeller; Kissinger: Master of “realpolitik” of the vilest, most contemptible kind (Pol Pot’s kind). The names of the *Triumvirate*, again: Bush, Rockefeller, Kissinger. Again: Bush, Rockefeller, Kissinger.

      These three aid and abet our enemy, and in so doing have made themselves our mortal enemy. Are they psychopaths? Surely they are tyrants and traitors, Q.E.D.

      Our founders would not permit their despotic rule to continue. Will we?

  13. Susan the other

    Liquidity is out of left field. It is not the basis for any economy. It is a desperate ad hoc measure. Liquidity is basically debt-free money which serves to keep the deeply indebted countries afloat via their big banks. And thereby also serves international trade and lending at profitable levels to financiers. It isn’t an expense to taxpayers but taxpayers receive little direct benefit. The central banks make their money back the next day so they aren’t losing anything. So far it has prevented a more serious depression. So why don’t we look at its effectiveness more closely? The unjust enrichment of financiers is skewing income distribution throughout society and as inflation rises, due almost solely to lack of growth and unemployment, only the financiers can afford to live. Liquidity should be offered to everyone somehow.

  14. LeonovaBalletRusse

    Pilkington’s full-snark call for the lynching of Paul Krugman in this sophomoric piece seems unworthy of a position of respect in Yves’s domain.

    Up to now, I thought he considered himself a scholar in the field, not merely an *expert*.

    Yves, Pilkington’s piece is filled with trash talk, and he whipped up a nice little lynch mob, in short order. No matter he thinks about Krugman’s theories, Pilkington DEBASES HIMSELF by this (I’ll use his word) “crappy” facsimile of what he deems to be just criticism.

    Shall I follow his lead in tone? Your trash boilerplate is “for the cornhole” Mr. Pilkington. You have claimed your place among the Beavis and Butthead constellation now.

    Yves, your site is being morphed into Not-Yves. Caveat!

    1. walter_map

      It should be obvious to any informed reader that Pilkington is a troll.

      His credibility went out the window the first time he ignored specific economic realities in favor of interpretations which are transparently perverse.
      The window closed the first time he grossly misrepresented and falsely disparaged the positions of actual economists, like Krugman and Galbraith.

  15. Economic Maverick

    Great Stuff. We need to get all the “Post Keynsians” together and make a big ideas push.

    Perhaps a video along the lines of the Hayek vs Keynes (was totally pro-hayek and distorted Keynes) except have it be something like Minsky vs Milton Friedman, or Functional Financial vs Neo-classical “mainstream”

    1. LeonovaBalletRusse

      “I think I’ve got it!” Pilkington is the Pope’s hatchetman!

      Does the very name, Krugman, not qualify the man who bears it for a quick *auto da fe* in financial terms? Might Krugman’s very authority–NOT *infallible*–not be a thorn in the side of the Holy Roman Reich IV? For we know that ultraconservative authoritarian finance goes along with the politics from that stealth Mein Kampf composed by the Jesuit Portuguese, Plinio Correa de Oliveira:
      “NOBILITY and Analogous Traditional Elites in the Allocutions of Pius XII: A Theme Illuminating American Social History” (York, PA, The American Society for the Defense of Tradition, Family and Property (TFP), “a registered name of The Foundation for a Christian Civilization, Inc.”, 1993)–with Foreword by Reagan’s Republican *Minister of Education*, Morton C. Blackwell.

      Shall we genuflect before Pilkington’s Holy Altar bearing the Sacrifice du Jour, Paul Krugman? Shall we add our faggots to the fire he’s burning under the Stake erected for the cruel disposal of Paul Krugman?

      You are a shameless rabble-rousing conspirator, Servant Pilkington, the blackest of hands! Begone!

      1. walter_map

        I have my own problems with Krugman, but on the whole I think he’s pretty good. Pilkington’s objections do not actually pertain to Krugman, but to some demonized version of Krugman fictionalized in order to create a target for disparagement.

        Like I said, Pilkington’s a troll.

  16. mac

    Krugman , to me seems to belong on a supermarket checkout magazine rack, right beside the adventures of Paris Hilton!

    1. LeonovaBalletRusse

      Yves, your site has been confiscated by rank amateurs, spoilers in the worst sense of the word, wreaking mayhem wherever they find intelligence they cannot abid. These are paid hoodlums on the payroll of the Global Racketeers.

      Where will the Moveable Feast of the Wise dine tonight?

      1. LeonovaBalletRusse

        Where IS Yves, actually? Has she been taken to an *undisclosed location*? Has she been arrested to wait for *no trial*? Say it isn’t so.

        1. LeonovaBalletRusse

          On second thought, here’s what you deserve: Mac, you are the pettiest, most mean-spirited little s*** to hit the forum at NC, apart from your Master, Troll Pilkington.

          You’re just the kind of dumb fink they choose to do their low-rent dirty work.

          You are the worst: a paid *destroyer of worlds*.

          Yves, will you please ban this nasty troll?

        2. Jack E. Lope

          Perhaps she meant that she can not become the “abd” that mac has become.

          Abd (عبد) is an Arabic word meaning one who is totally subordinated; a slave or a servant

  17. Proof

    I have to jump in here to agree with those saying this article does not really fit with NC.

    I’m not an expert, but your assertions about monetary policy are both self contradictory and don’t seem to match historical evidence. You state that MP is both totally ineffective and negatively effective in the current crises and the great depression. The recent rate hike in Europe that was swiftly reversed, from my perspective, seem to argue against your conclusions.

    Your argument around savings also seems to be a Republican style trickle down argument. Positive net worth individuals that are making savings decisions are, as a whole, doing fine in this economy and are not going to increase spending significantly with higher interest rates. It seems that higher returns to those people are likely to just lead to additional savings, of which there is already a glut. The real problem is those in debt who have cut back on spending, and who show up at walmart on check day to spend every penny they have. Real negative interest rates help these people.

    The idea that giving larger positive returns to the wealthy so they can spend and help the economy does not fit with NC, or reality as far as I see it. Spending by those living off of investments seems to be holding up just fine.

    1. spooz

      Tell that to the seniors who didn’t realize they would be earning less than 1% on their nest eggs. Careful planning and thrifty living was obviously the wrong idea. The real way to wealth is using leverage to the extreme, hoping for the bailout when the jubilee comes.

      “Spending by those living off of investments seems to be holding up just fine.”

      1. Jack E. Lope

        Who advised seniors to put their nest eggs into short-term Treasuries?

        Are there many seniors who followed that advice? I mean, any not made of straw.

  18. Mike Sax

    Your making an argument in favor of “savers” and you say Krugman doesn’t get Keynes? I really don’t see how inflaton is a threat right now. That actually puts you in the libertarian camp with Herman Hoppe.

    There is a lot the Fed could do right now, it is not solely about interest rates but expectations as a quality Kenynesian like Eggertsson points out. You say monetary policy has no effect and your proof is that only those who believe it does uses “toy models.”

    What exactly was Krugman so wrong about with regard to Japan? If you know the answer to their 20 year recession you ought to give it, as Japan has never come out of it.

    One thing Bernanke could do right now is announce a higher inflation target like 3 percent. For the reocrd I’d like to see more fiscal stimulus too but thell me where that’s gonna come from right now in the land of gridlock that is Washington DC?

    It’s also possilbe that Mark Zandi is right and as today’s number suggest the economy is recovering, indeed is expanding. In fact it surely is, the real fly in the ointment if Europe and yes they could use some help from the ECB.

    Or they should leave the EU. But to not have your own courrency and have no lender of last resort is the worst of all worlds.

    1. walter_map

      Quite correct: there is no inflation threat. The purpose of the ‘inflation threat’ argument is to prevent the reduction in the flow of wealth from the general population to the hyperrich through a Keynesian approach to economic recovery. This also explains the ongoing disparagement of Keynes and Krugman over the last couple of years. Naturally the economic powers that be are going to oppose any policy or position which reduces their rate of plunder, and they have long since adopted the most appalling dishonesties in the service of that opposition.

      As usual, follow the money.

      1. Fiver

        QE2 instantly sent commodities on a tear. Bernanke himself said numerous times AFTER QE2 was done, that (I paraphrase) “the effects of high oil prices will diminish going forward” or “will continue to diminish going forward”. Inflation went up in the US, and particularly of course, for food, clothing (cotton prices) and energy.

        In any case, it was much of the REST of the world that ate it big time – China and other “emerging markets” immediately overheated, but it was weaker countries that did the worse. It was no accident that much of the Middle East had serious problems right in the middle of QE2.

        And it would, and will, happen again. Let’s try to be at least minimally mindful that US policy first in creating the crisis, then in its response, has been an absolute disaster for much of the globe.

    2. Martin

      I have to agree with Mike Sax here. Krugman’s first position is that massive fiscal stimulus is needed. However, he is of the opinion that will not happen (as is just about everyone else paying any attention). So he is looking for something, anything, that might help the situation we are in. One of his solutions is inflation targeting and negative real interest rates, the author gets that part right. That inflation would directly target household debt dynamics by inflating away household debt over time, assuming that inflation flowed through to workers incomes (I think Krugman has been unclear on how inflation would flow through this channel since there are so few ways for workers to have leverage against employers on wages).

      The author, however, seems to want an interest rate set somewhere way above what it is now. 3%? 5%? He doesn’t address even remotely how this would work. Savers would earn more income sure, and how much would businesses borrow when the risk free rate is 5%? They aren’t borrowing much now with it at 0%, so unless the author addresses how this higher interest rate would not severely further depress investment and therefore cause outright deflation, the post seems rather useless to me. The argument seems to be that the demand depressing effects of the higher interest rates would be swamped by savers coming out of the woodwork with new demand and spending from their newly found income stream. And the justification for that opinion seems to be “I really think it would work, trust me”. You can argue with model based approaches and have plenty of valid arguments, but “my intuition is just better” is not a valid argument.

      1. Fiver

        Workers would get nothing but higher prices. They have ZERO bargaining power. The big winners are in ranked order:

        1) Wall Street predators.

        2) The top 2 income quintiles, who hold by far the bulk of debt.

        3) Government.

        4) People who are struggling with debt – but note they won’t be spending wildly, nor even if they did does their spending have nearly the impact as those in (2).

        At best it’s trickle down for a bunch of crappy, revolving door “service” jobs.

        And as noted in another comment, a US policy of further “easing” by whatever means is bad news for a large portion of the world – very bad news.

        1. Fiver


          Number (2) should read: The top 2 income quintiles, who owe by far the bulk of household debt.

    3. LeonovaBalletRusse

      “in the camp with Hermann Hoppe.” Precisely.

      “This site has been confiscated by rank amateurs.” These people are a plague of trolls, no doubt intending to ruin the hard-won, formerly excellent site, Naked Capitalism. Their posse of trolls has crashed the forum of the commentariat. This is *dilution* writ large.

      Yves, are you in the area? Have they taken you away for giving *We the People* a stage for free expression?

      We know you need rest, Yves, but please *phone home*.

  19. Fiver

    I gather my first comment (very near top)wasn’t clear, so I’ll have another go:

    I find it rather odd that Mr. P. goes after Krugman for advocating “printing” in some form, when he (and Yves) and others presented here have all made it central to any “solution” for the crisis in the Eurozone (ECB must be the backstop, which effectively means “print” as money is being exchanged for a mountain of dead paper). Anyone (especially anyone with a German accent) who begs to differ is asking to be sorted out in short order.

    Just in the most recent piece by “Mosler/Pilkington” we have this:

    “When the ECB buys European national government bonds it credits member bank accounts on the ECB’s spreadsheet. Those accounts count as ‘money’ while the bonds did not count as ‘money’ and so, this action is said to be ‘printing money’ – and printing money is bad for some reason or other according to our German friends… and so the ECB undertakes a further step: sterilisation.”

    And I’ve many times seen someone here taken to task for arguing inflating away the debt is an undesirable way of going about ‘fixing’ this mess, even those using the “what about the savers?” argument. Quite the opposite, that, with Krugman, inflation has been maintained as “good” in these circumstances.

    For my part, any “easing” (printing) by Central Banks in 2011 MUST take account of the reality of complete and total corruption. Printing was always the path of least resistance for maintaining status quo power relations, in modern times dressed up in noble “liberal” prose and purpose to “spur growth” to “create jobs”. But to advocate it NOW, when the mechanisms hand the new money directly to the worst bastards on the planet to go on another rampage since NOTHING ELSE HAS CHANGED is just fucking nuts.

    Anyway, which is it P.P.? Leaving MMT aside, are you actually against massive “printing” in the here and now, when it’s really on the table, or only “in theory”?

  20. Brett

    Wow Krugman must have been a very different person 15 years ago. I can’t imagine him writing that today. It’s like a snooty condemnation of Galbraith as Not Serious like Krugman.

  21. Jack E. Lope

    Wow. I was thinking that I’d have to re-read Pilkington’s article again – maybe even s l o w l y, if required, starting with the quote that is quite unlike what Krugman has been saying recently. (I see that it was written 15 years ago. Hell, 15 years ago I think I voted Republican!)

    Then I started reading the ad-hominems in Pilkington’s replies to comments. If the major weapon is Snark, with maybe fear, surprise, ruthless efficiency, an almost fanatical devotion to the Pope, and a nice red uniform or two, I am disinclined to analyze the criticism for any valid points that may remain.

    Particularly childish is Pilkington’s “You get what you give” excuse for dishing out abuse over substance. If my Mom did not fall for “She hit me first”, why should we fall for this?

  22. Mike Sax

    I got to admit the post is better read slowly to have any shot of getting the point. I’d have to see the context of Krugman’s piece before going off the deep end about something he said 15 years ago.

    Incidentally Galbraith-no matter Krugman’s quote -certainly knows how much the prospects of economic growth go through Fed policy. If you read his 1997 book-or stuff he’s writen more recently-he sees the lowered standard of living we;ve seen over the last 30 years as a direct result of the Fed under Volcker especially moving the Fed from a Full Employment focus to a hawkish proccupation with inflation alone.

    1. Jack E. Lope

      Mike Sax,
      Pilkington was kind enough to source the quote – Krugman’s name under the quote is also a hyperlink to .

      On my first reading, I found it difficult to parse any cogent arguments from the swamp of snark. If the snark-to-substance ratio had been lower, or if Pilkington would have avoided the primary tactic of glib personal denigration in his comments, I might have made the effort to go back and dredge out some substance from the article.

      1. Jack E. Lope

        Oops. When I read what I wrote, the change-of-subject is not so clear. My second paragraph refers to this article by PP. I had no difficulty parsing Krugman’s 1996 review.

  23. Mike Sax

    What Phillip is saying may have some validity in China from what I understand-there has been discussion that the Chinese people(who put a premium on savings) respond differntly than our text book tells us.

    However in the U.S. raising the interest rate never stimulates economic acitivity-the opposite. For example when Volcker raised rates to double digits that was a tremendous boon to savers but the unemployment rate went to 11.3# which is the highest rate since the Depression-even in teh current crisis the rate never went that high.

    The other thing I think is that Phillip is making the mistake of assumign correlation is causation. Just because the recovery has been slow-it looks like it’s speeding up now-doesn’t mean that this was caused by Fed easing.

    On balance the monetarists are right that just because interest rates are 0 doesn’t mean the Fed has been dovish. Right now raising the inflation rate I think could do a lot to stimulate things-even to 3% or do what the Fed guy Fisher suggests and say they’ll tolerate higher inflation until the unemployment rate goes beneath 7%.

    By the way Phillip, I checked that MMT guy of yours and he basically argues that interest rates should always be kept at 0, arguing that Japan has done that for a decade and no inflation.

    True, and that’s a problem. Inlfation can definitely be too low and has been in Japan. In fact Japan proves monetary policy is not just about a low nominal interest rate-what about real rates-and more important are future expectations.

  24. Mike Sax

    Finally, you got to understand that nature abhors a vaccum. I like most Keynesians wanted more stimulus but that politics on that haven’t worked.

    This is why many like Krugman have put some hope on monetary policy-Krugman has come to the idea of NGDP somewhat resignedly.

    The trouble I guess with this post is that it has no answers as to what should be happening now.

    When you say “Discussions like this can refocus policymakers’ interest in fiscal policy by showing that monetary policy is a bunch of watered-down hooey that is fickle and unpredictable in its effects. In that, we can try to exorcise the neoclassical demon as best we can and bring government policy back to where it was in the three decades after WWII. Here’s hoping”, I think you are probably going to be disappointed.

    The truoble is that you really overstate your case in poo-pooing monetary policy. If you want to bring government policy to where it was three decades after the 70s so do I. But it was not just fiscal policy that changed it was also monetary policy.

    Again read Galbraith who you want to defend. He says-as does another quality Keynesian like Dean Baker-that more important than any bad fiscal policy in the last 30 years of staganation for most Americans is the Fed moving from Full Employment policy. That has been the most harmful, along with Treasury promoting an overvalued dollar.

    I reccomend you read Baker’s new book available on PDF “The End of Loser Liberalism” and tell me all monetary policy is about is playing with “toy models.”

  25. Mike Sax

    Yes, Jack and Phillip, I admit that in reading it Krugman doesn’t sound like the Krugman of today. It was a different time thoguh and a lot of us think differntly than we did then.

    At the time the U.S. was going through the greaterst peacetime expansion in history and everyone was talking about “ending welfare as we know it.”

    15 years later we all know better-that American Dream has been hurt by Reaganism and also Voclker’s inflaton phobic Fed. We see that the middle class will be victim of the same pressures that the poor will.

    However none of this has much to do with the discussions today over monetary policy.

  26. Thomas McGovern

    The Fed may be incapable of doing good, but it is fully capable of doing bad. The Fed’s creation of new bubbles to counteract its previous bubbles is primarily what has gotten us to where we are today. It was the Fed’s repeated lowering of interest rates that made many other things profitable, such as sub-prime mortgages. Sub-prime mortgages would not have been originated if the sub-prime borrowers had to pay rates that were the historical norm.

  27. physguy

    I seriously don’t understand this blog post.

    Yes, it’s true that lowering interest rates helps borrowers (inducing them to spend more, and raise GDP) while, at the same time, it hurts savers (inducing them to spend less, and lower GDP). But is there ANY reason to expect that the latter effect dominates over the former?

    In ordinary circumstances, there is abundant empirical evidence that it doesn’t (and, hence, that monetary policy works as its proponents say it does).

    Admittedly, our current situation is far from ordinary, but you haven’t given a shred of an argument that, under current circumstances, the effect on savers should dominate.

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