Paul Krugman Still Believes That “The Debt” Can Be a Problem for the U.S.

Yves here. Unfortunately, correcting Paul Krugman continues to be a staple at Naked Capitalism because he keeps asking for it. Here we turn over the job to the able Joe Firestone.

By Joe Firestone, Ph.D., Managing Director, CEO of the Knowledge Management Consortium International (KMCI), and Director of KMCI’s CKIM Certificate program. He taught political science as the graduate and undergraduate level and blogs regularly at Corrente, Firedoglake and Daily Kos as letsgetitdone. Cross posted from New Economic Perspectives

The deficit is now down to under 3% of GDP, and in contemplating that fact, Paul Krugman asks why the deficit hawks aren’t celebrating the precipitous fall from nearly 10% of GDP a few years ago. He then explains that:

Far from celebrating the deficit’s decline, the usual suspects — fiscal-scold think tanks, inside-the-Beltway pundits — seem annoyed by the news. It’s a “false victory,” they declare. “Trillion dollar deficits are coming back,” they warn. And they’re furious with President Obama for saying that it’s time to get past “mindless austerity” and “manufactured crises.” He’s declaring mission accomplished, they say, when he should be making another push for entitlement reform.

All of which demonstrates a truth that has been apparent for a while, if you have been paying close attention: Deficit scolds actually love big budget deficits, and hate it when those deficits get smaller. Why? Because fears of a fiscal crisis — fears that they feed assiduously — are their best hope of getting what they really want: big cuts in social programs.

So, he unmasks them and then goes on to say:

But isn’t the falling deficit just a short-term blip, with the long-run outlook as dire as ever? Actually, no. Falling deficits right now have a lot to do with a strengthening economy plus some of that “mindless austerity” the president condemned. But there has also been a dramatic slowdown in the growth of health spending — and if that continues, the long-run fiscal outlook is much better than anyone thought possible not long ago. Yes, current projections still show a rising ratio of debt to G.D.P. starting some years from now, and uncomfortable levels of debt a generation from now. But given all the clear and present dangers we face, it’s hard to see why dealing with that distant and uncertain prospect should be any kind of policy priority.

That is, Paul Krugman is saying that

– he doesn’t think it’s necessary to deal with a possible long-term rising debt-to-GDP ratio now, because of the many other problems we still have to face; but he’s also implying that if the projection of such a rise holds later, then we will have to deal with it at that time;

– the lowered deficit now is due to a both a strengthening economy and some austerity measures, thereby excluding the possibility that it is due to the recovering economy alone, in spite of the fiscal drag from reduced Government spending at the Federal level pulling in the opposite direction; and

– “. . . uncomfortable levels of debt a generation from now” are a possibility, implying that high levels of debt, and debt-to-GDP ratios mean something to the fiscal sustainability of Government spending in the United States.

Also, what he is not saying is that the deficit is far too low for a full employment US economy that can drive up wages and drive down inequality, courtesy of both major parties and the Administration, who made deficit reduction a priority since the stimulus bill passed in 2009. So what does this tell us about the thinking of the “progressive” economist with the greatest name recognition among the public and the Democratic Party faithful?

Simply this:

– Krugman evidently still is communicating to progressives and Democrats that levels of debt and the debt-to-GDP ratio matter for a nation like the United States with a non-convertible fiat currency, floating exchange rates and no debts in a foreign currency.

– He ‘s still implying that it was good to cut the deficit using some austerity, even though we still have 25 million Americans wanting full-time jobs who can’t find them.

– He’s still saying that higher debt levels can be a problem for future generations.

And by not saying that the deficit is too low for the economic context of the US in 2014 – 2015, he is also telling us that he still doesn’t understand the significance of the Sectoral Financial Balances (SFB) Model, and in particular that if the deficit has been driven down to under 3% of GDP by the politicians, that implies that the sum of private sector savings and current account balance cannot exceed 3%, and further that if the current account balance is approaching 3% as I believe it is, then that must mean that aggregate savings for the private sector was close to 0% in 2014.

A bad year for the private sector by any standard, and the lowest aggregate savings figure for the private sector since the first quarter of 2008. That is not a good sign for the continued recovery of the economy, and judging from his column quoted earlier, Krugman doesn’t appear to have a clue about the sheer fiscal irresponsibility of driving the government deficit down to a low enough level that there is no surplus available for the private sector to save. Now that’s austerity. But Krugman’s claiming that austerity is over.

In addition, the fact that his continued belief that the level of debt subject to the limit and the debt-to-GDP ratios can be a problem for our economy, means that if we listen to his advice we will one day have problems with our economy. This is true because sooner or later he is bound to conclude that the existing level of debt, or the debt-to-GDP ratio, is too high to allow the US to deficit spend very much to get to full employment, or create an economy that is fully recovered from a depression or serious recession.

Government fiscal policy should be targeted on public purpose outcomes such as full employment, price stability, Medicare for All, a strong safety net, renewed infrastructure, re-invented energy foundations, etc while the deficit, the debt, the debt-to-GDP ratio, and the current account balance are allowed to adjust to spending, as they will (to float). That is Real Fiscal Responsibility in fiscal policy. And there is no room in the process of implementing it to target arbitrary values of debts and deficits; because they are not important in themselves for a nation like the United States with a sovereign fiat currency. More on the idea of Real Fiscal Responsibility and an effort to spread the idea is here. Please help us do that.

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  1. YankeeFrank

    Really fantastic piece. It clearly illustrates the massive contradiction, and inherent dishonesty, at the heart of new “Keynesian” economics. Krugman knows fiscal policy is vital but refuses to take the logical next step, likely out of a tepid sense of rectitude more than any sound economic reason.

    1. Jack King

      Let’s look at the “old” Keynesian for a minute. Keynes himself never advocated that deficit spending be a long term option. Essentially he advocated that it should be used as a tool to quell deflation. I’m assuming you have actually read Keynes, correct?

      1. Calgacus

        Keynes himself never advocated that deficit spending be a long term option.

        No, he did. Spending was to be a tool to quell unemployment above all and the time and amount was not really predictable. The idea that a burst of “pump-priming” spending would be enough to return to a “natural” state of full employment equilibrium is bad “Keynesianism”, but the antithesis of Keynes’ mature thought. To quote him, “Look after unemployment, and the budget will look after itself.”

        I am not as critical of Krugman as Smith & Firestone, he is saying the right things now. His important statement below outweighs minor errors:

        Deficit scolds actually love big budget deficits, and hate it when those deficits get smaller. Why? Because fears of a fiscal crisis — fears that they feed assiduously — are their best hope of getting what they really want: big cuts in social programs.

        High debt levels could conceivably, theoretically be a problem as Krugman says. Where he errs is in suggesting that this is anything but a rather idle observation, one that has no real relevance to the USA. He does call it a “distant and uncertain prospect”. So the fact that he probably doesn’t understand this idle observation as precisely as Keynes and Lerner did is again, practically, not very important.

        1. Jack King

          Sure, the ultimate goal was to bring down unemployment, but, classical econ theory could do that once demand was at a point of raising prices. This was the case around 1937 when Keynes recommended that policy makers return to classical macro policies. See, London Times — Jan 12 – 14, 1937; Collective Writings, Vol 21, p. 385

          1. Tammy

            I think Krugman, if I am understanding his argument, has positioned himself to argue–the coherent running thread–we have a demand-side problem and not a supply-side problem.

            1. Jack King

              You are correct that Krugman gives little credence to Charles Mundell’s supply side thesis, but Krugman is wrong. Economics is a dance between demand AND supply. Keynesian policies affect demand…and they work up to a point. But to ignore the supply side is what sustained the Great Depression….policies such as the Wagner Act, implementing Social Security which would take spendable funds out of their weekly paycheck (wait until after the economy recovers), Raising taxes on the rich (top marginal rate increased from 63% to 79%), excise taxes raised, corporate taxes raised, etc etc…Some of these would dampen the demand side, other the supply side. It is no surprise and very sad that it took a world war to get us out of a depression.

              1. Tammy

                After reading your comment I still am unclear where Krugman is wrong. His argument is similar to your own. He argued the stimulus–short term [supply-side] intervention from the government–wasn’t large enough. Hence, our recovery from the Great Recession is in a slump.

                In any event, I agree with you.

                  1. Tammy

                    Jack…Doesn’t what I wrote read what you said? No sarcasm intended. Are you thinking of the Canadian economist Robert Mundell? I don’t see how Krugman would disagree with you…still.

                    1. Jack King

                      The supply side is focusing on the suppliers…businesses who offer goods and services. Supply side policies would mean lower corporate taxes, less regulation, less mandates, lower capital gains taxes for investors who are risking their capital in new projects which potentially mean new jobs…etc etc

                1. Tammy

                  I think the point being made is no war no deficit spending to get the United States back to business as usual. The rest is pleasantries.

                2. Jack King

                  Same thing. We also needed very strict wage and price controls during the war to prevent hyper inflation. The war did finally pop us out of the depression. The men we off fighting in a foreign war and the women were in factories. Not the best way to cure unemployment.

          2. Ben Johannson

            Keynes recommended direct job creation and easy monetary policy as significant component of counter-cyclical stabilization in addition to fiscal expenditures. The focus on spending alone was a result of pump-priming fetishism by American economists who ignored his much broader work in their desire to appease the business class.

            After the GT there could be no return to classical economic policies, not when Keynes had put to rest the notion of a labor market in Chapter 2.

            1. Jack King

              For such a short post it’s glutted with obfuscation. GT? …and Chapter 2 of which of Keynes’ works? Page number would help.

          3. Calgacus

            We may agree, but it is still not clear to me. I don’t think “return to classical macro policies” is what Keynes had in mind in the cited article, How to Avoid a Slump. He isn’t saying that “classical econ theory could do that once demand was at a point of raising prices” . Rather, his point was that there is a difference between “low full employment” and “high full employment” in Lerner’s terminology. That there was such a thing as stagflation, to use the 1970s terminology, or roughly, “semi-inflation” in Keynes’ own words. At “low full employment” (neo)classical theories begin to be not-completely-crazy. At real, “high full employment” they begin to be a sometimes tolerable approximation to reality.
            So up to a certain point in a depression, just piling on the aggregate demand through “general stimulus at the centre” is helpful, but after some recovery, targeted policies ( like a JG) are far more necessary. But this JG / WPA type spending is not “classical macro”. Keynes contends that “[we] are faced with a scientific problem which we have never tried to solve before” and later advises “We must avoid it [the classical macro response to inflation, high interest rates], therefore, as we would hell-fire.”

            1. Jack King

              Keynes states on p. 385:

              “But I believe that we are approaching, or have reached, the point where there is
              not much advantage in applying a further general stimulus at the centre.”

              In short, Keynes never intended that deficit spending should be a sustained policy, and to just keep running up debt. Keynes further writes:

              “National debt should be to its own citizens. Moreover, tax rates should never have to be increased to pay for the new debt. ” Collective Writings, 20:349

              1. Calgacus

                The “in short” is an incorrect summary of Keynes’s general point throughout, which I however think is right. He is not saying that at such a point, deficit spending MUST STOP, that we must stop running up debt. He is saying that at this point, which is much like the position of the USA before the “Roosevelt Recession”, & not entirely unlike the USA and much of the world now, the real need is for targeted “ad hoc” measures, not whole-hog emergency “general stimulus”. So Keynes’s article, that I linked to above, is good and topical reading I recommend to anybody here.

                Continual deficit spending, “good deficits” to maintain full employment as business as usual are to be expected. That was the experience of the whole world in the good years, the postwar “Keynesian” era. Persistent but small, efficacious “good deficits”, leading to a slowly rising National Debt is to be expected, is truly “natural”.

                The more general theoretical idea that Keynes began to clarify was that “functional finance is sounder than sound finance”. “Sound finance”, “austerity”, mainstream neoclassical “economics”, spending cuts leads to BIG BAD deficits. Functional finance / Keynes / MMT/ institutional economics, spending for full employment, leads to deficits, but usually to Small, Good ones. The Krugman quote above is not so far from this perhaps-paradoxical realization, which is why I am not so critical of him.

                1. Jack King

                  Nice spin….So by not needing further stimulus he really means apply more stimulus. Got it.

                  “Continual deficit spending, “good deficits” to maintain full employment as business as usual are to be expected.”

                  But if we have full employment, why in god’s name do we need to continue running up the debt? Employment was fine under the Clinton surplus. And explain this. In a very few years as interest rates rise, we will hit $1 trillion/year in interest payments. Basically we will be using 1/4 of the entire budget just to pay bond holders interest. Note I said nothing about principle payments. Do you really believe this is sustainable?!

                  1. Ben Johannson

                    Worker/job offer ratio of 1:1 occurred during the Clinton Administration due to private sector deficit spending, which is not sustainable. Only the government sector can maintain that sectoral balance position indefinitely.

                  2. Calgacus

                    Nice spin…. The spin, the qualifications, like the words “ad hoc” are basically Keynes’, not mine. For instance, he later suggests in that article that while taxes should rise for war spending, they shouldn’t be expected to equate to the spending amount.

                    But if we have full employment, why in god’s name do we need to continue running up the debt? Because people have non-zero savings desires, population increase, etc. Full employment won’t usually be maintained without a small amount of “running up the debt.”

                    “The proportion [of investment, including ‘government investment’ like “relief works and armaments”] will be just right if it is the same as the proportion of their incomes which the community is disposed to save when the national resources of equipment and labour are being fully employed.”

                    Employment was fine under the Clinton surplus. The Clinton surplus was an unusual phenomenon. Savings desires became negative. People used their houses as ATMs. This caused the surplus because taxes functioned as hyperactive automatic stabilizers dampening the boom, so well that it would have caused the 2008 crash years earlier if not for Bush’s (misdirected) tax cuts. Finally, unemployment was not fine for the unemployed millions then, who would have benefited enormously from the JG that the MMTers were proposing back then, as would have everyone else.

                    And explain this. In a very few years as interest rates rise,
                    Interest rates won’t and can’t rise unless the government decides that they should rise. Keynes devoted much of this article to saying that this should be avoided like hell-fire.

                    we will hit $1 trillion/year in interest payments. Basically we will be using 1/4 of the entire budget just to pay bond holders interest. Note I said nothing about principle payments. Do you really believe this is sustainable?!
                    Yes, of course. Any deficit whatsoever is “sustainable” in principle. What is not sustainable-in-principle are government surpluses. You can’t pay taxes with money you don’t have because the government hasn’t printed it. QED. Keynes & Lerner discussed the situation where all of a state’s spending was on interest payments to bondholders. Not usually desirable, but not unsustainable or impossible.
                    Bell/ Kelton’s Functional Finance: What, Why, and How is a relevant paper I came across looking for a cite for this Keynes-Lerner discussion. In any case, sustainable-in-principle is not the same as sustainable-without-inflation. There is of course a bound on how much the government can spend without setting off inflation. That is why MMT proposes the JG, which is the least, tightest-fisted, least inflationary spending to achieve full employment at the desired minimum wage. That is why Keynes and Lerner and their modern successors want (deficit) spending to taper off- but usually not cease – when full employment is approached, and that is the theme of Keynes’s article.

                    1. Jack King

                      “he later suggests in that article that while taxes should rise for war spending, they shouldn’t be expected to equate to the spending amount.”

                      What war? This was 1937. And raising taxes in the middle of a Depression is not exactly the most efficacious policy is it.

                      “Full employment won’t usually be maintained without a small amount of “running up the debt.”

                      Bull shit. Look, economics is about supply and demand. Keynesian deficits did stimulate the demand side at least by quelling deflation. But the supply side was completely ignored. In fact the US policy was working against it. The Wagner Act actually raised wages in the face of falling demand for labor. It still worked out pretty well unions who were lucky enough to get work, but the non-union workers were cast to the wolves. Then there was a tax increase on the rich with the marginal rates going from 63% to 79%. Then there was the increase in corporate taxes. What was the result? Stimulating demand had dropped the unemployment from 24% to 14%…then back up to 19%. Why? The supply side was ignored. If we had business friendly policies the depression would have been over.

                    2. Ben Johannson

                      “Full employment won’t usually be maintained without a small amount of “running up the debt.”

                      Bull shit. Look, economics is about supply and demand.

                      As you’ve been told, there is no labor market and the quaint notion that laws of supply and demand rule the transactional world is a fantasy. There are no economic laws.

                      There is a desire (waxing and waning) to net-save in a monetized economy as a hedge against future uncertainty. That means the private sector in aggregate typically spends less than it receives in incomes which creates unemployment. The government sector is the only one which can make up the difference on demand and sustain that policy.

                      Calcagus already explained this but in your eagerness to use the word “bullshit” (which no one ever saw on the internets before) you completely ignored the accounting reality and jumped to the old right-libertarian “supply/demand” canard.

                    3. Jack King

                      My2c from experience, industry sets the price i.e. administered and is highly recalcitrant to lower prices as it sees market share as an ownership issue.

                      Depends on how competitive the market and the price elasticity of the product/service.

                    4. skippy

                      “Depends on how competitive the market and the price elasticity of the product/service.” – King

                      Industry writes the laws to competition as the preferred experts, see: lobbyists, political bribes, ideological capture, public – private revolving door, et al.

                      skip… anyway – “Much of the research conducted by early Chicago School sociologists focused on understanding the factors that inhibited or facilitated assimilation of immigrants into U.S. society. This issue captured their attention because European immigrants and freed slaves migrated in large numbers to the city in search of work as it rose to prominence as an industrial center. While these sociologists had good intentions of helping newcomers fit in and prosper, some of the writing that came out of this research fueled the belief that there is something fundamentally or pathologically wrong with those who “fail” to do so.

                      The assimiliationist approach, touted especially by Robert E. Park, takes for granted that assimilation into white, middle class lifestyles, values, and behaviors is desirable and right. It failed to account for the social and cultural violence that these expectations do to a group of people posed as “other” to the perceived normativity of whiteness. In the late 19th and early 20th centuries, some very disturbing practices connected to these ideas played out around the country. Nearby in Detroit, Michigan, Henry Ford created an in-house sociology department in 1914 to micro-manage and control the home lives of workers in his factories, even going so far as to peg a living wage to worker compliance with his rules of behavior and lifestyle. Social scientist Nayan Shah, in his book Contagious Divides, demonstrates through careful historical research how these ideas were used to oppress and control the Chinese immigrant and Chinese American populations in San Francisco through the mid-twentieth century. ” – Nicki Lisa Cole Ph.D

                      skippy… classical and neoclassical economics is little more than a failed sociological indoctrination.

                    5. Ben Johannson

                      Depends on how competitive the market and the price elasticity of the product/service.

                      Over a dozen studies by Blinder demonstrate most American firms administratively price on a cost-plus basis, altering prices only four times per year or less. Flexprice other than in speculative products like finance does not describe developed markets which much more closely resemble Hicksian fixprice.

                    6. Jack King

                      Over a dozen studies by Blinder demonstrate most American firms administratively price on a cost-plus basis, altering prices only four times per year or less

                      Sure…but what if my cost exceed the competition? Basically I’m out of business.

                      For an example of pricing, let’s look at the oil industry. Does big oil control the price? Nope…the spot price is determined daily on the exchanges, based on supply/demand factors. In the 1970s OPEC formed a cartel and drove up the price by withholding supplies. It worked for a while, but it really backfired because costs to businesses and consumers went up so much that demand for oil dropped as did the spot price on the exchanges

                    7. Ben Johannson

                      For an example of pricing, let’s look at the oil industry. Does big oil control the price? Nope…the spot price is determined daily on the exchanges, based on supply/demand factors.

                      That’s not correct: Saudi Arabia determines the range within which oil price is allowed to fluctuate as it is the sole country with sufficient productive power to move international spot markets. The commodity is still administratively priced.

                    8. Jack King

                      Saudi Arabia determines the range within which oil price is allowed to fluctuate as it is the sole country with sufficient productive power to move international spot markets. The commodity is still administratively priced.

                      Sure…and when the formed the OPEC cartel they had an oligopoly. But this topic is about companies manipulating the price, not countries.

                    9. Ben Johannson

                      No, Jack. This is about most prices being set by administration rather than market interactions. It means that models assuming instantaneous or near-instantaneous adjustments made to bring supply and demand into equilibrium do not apply to most of our economy: new classical, New Keynesian and austrian models fall into that category and once we recognize their inapplicability we return to the supremacy of Keynes/Kalecki effective demand.

                    10. Jack King

                      No, Jack. This is about most prices being set by administration rather than market interactions.

                      Really?! So Exxon-Mobile is the one who engineered the drop in a barrel of oil from over $100 to $90? If this is how they “administer” prices I’m selling my stock.

                    11. Ben Johannson

                      Really?! So Exxon-Mobile is the one who engineered the drop in a barrel of oil from over $100 to $90? If this is how they “administer” prices I’m selling my stock.

                      Either you aren’t thoroughly reading or you don’t comprehend, as this comment does not address what was written. Boring.

                    12. Jack King

                      Well Ben, I was responding to Skippy who said:
                      “My2c from experience, industry sets the price i.e. administered”

                      Obviously unless one is talking about an oligopoly, prices are dictated by the market, not CEOs. I’m sure you agree.

                  3. Jack King

                    First you claim:

                    “As you’ve been told, there is no labor market and the quaint notion that laws of supply and demand rule the transactional world is a fantasy. There are no economic laws.”

                    Then you contradict yourself by saying:

                    “The government sector is the only one which can make up the difference on demand and sustain that policy.”

                    Brilliant. I have seen politicians continually contradict themselves. But I’ve never seen anyone who knew anything about economics do it almost in the same paragraph.

                    1. John Zelnicker

                      Help me out here, Jack. What exactly is the contradiction? I know I can be as dense as grandma’s fruitcake but I just don’t see it.

                    2. John Zelnicker

                      I was serious when I said I can be dense, but I’ll try. Are you saying that because the first quote says that there are no economic laws and the “laws of supply and demand” don’t rule the transactional world that to refer to demand being supplied by the government is a contradiction? They seem quite different to me and barely related. The fact that there are no economic laws of demand and supply does not imply that demand does not exist or that the government can’t supply additional demand.

                      What am I missing, please?

                    3. Jack King

                      Before I go any further, do you really believe there are no laws that relate to demand and supply?! We can empirically prove these laws by plotting price and quantity data points, and even determine the elasticity of it. I must say that I have heard so much crap on this blog that we might has well throw out every econ text book written in the last 50 years.

                      To your point….demand exists but there are no laws that govern it. But deficit spending will stimulate demand, and balance budgets will dampen demand….is that not a law?

                    4. John Zelnicker

                      Okay, I see now where you are coming from. Here’s how I see what Ben is saying. While there is a relationship between supply and demand, it is not a “law”; a law being something that holds true in all situations. His first statement in your response that laws of supply and demand do not rule in the transactional world, said in regards to a “labor market” is correct, since there is no “labor market” but rather individuals seeking employment at the best deal they can get. The second statement that demand can be provided by the government is also true, usually, but there is still no law relating supply and demand.

                      And, no, the concept that deficits will stimulate demand and balanced budgets will depress demand is not a law. Whether or not those things happen depends on many other factors. For example, there was a big increase in the deficit in 2009 and some stimulus to the economy, but much of it went to bail out the banks and did nothing to increase demand.

                    5. Jack King

                      I’m not going to get involved in a session of polemics like a couple of fundamentalists arguing the esoteric meaning of a scripture. To move forward, let’s ignore the fact that every text book uses the word “law” to describe the movement of prices in relation to supply and demand. My point is that deficit spending does have some effect on demand. But government policies toward business, also affect supply. The focus of fiscal policy in the 1930s was totally on the demand side. However, government was not just neutral to the supply side, but hostile to it. Ipso facto, we stayed in depression.

                    6. Ben Johannson

                      It isn’t a law of economics that the government sector has a license to control the currency, it’s a legal reality resulting from the government’s position as sovereign. That framework can change but until it does there are three options: the private sector can take on debt, the country can run surpluses against the foreign sector or the government can spend. Until something happens option 3 is the only sustainable path for transferring net financial assets to private use.

                      If you think there are iron-clad laws of economics that function akin to the laws of physics then state them, otherwise you’re wasting the time of a number of people like John and Calcagus who are being very patient in trying to teach you something.

                    7. skippy

                      Next some will say “I am sorry you do not understand the concepts of positive balance and negative balance – which also have formal meaning and scientific concepts behind them.”

                      When the rub is… there is no scientific anything involved… human interaction is not governed by science… full stop. Its governed by man made laws ergo: the law of supply and demand is more akin to a societal template, we are indoctrinated to believe in ipso facto.

                      The term – law – to it, is more relative as a cognitive precursor than a scientific observation i.e. Natural law to be obeyed, but, not bound to by gravity.

                      skippy… Econ books of the last 50ish years[???], wellie some might find correlation and causation in that imo.

                    8. Jack King

                      To move this discussion forward, did I not agree to drop the term “law” in spite of the fact that it is used liberally in economic text books? If you insist on sustaining your fetish with this word try goggling “supply and demand” and see how many times the word “law” pops up. Try Wikipedia. Anything….the internet is a great tool. But if you want to drop your fetish, move forward and reply to my specific response above.

                    9. skippy

                      Some light reading.


                      Precision vs. accuracy, equilibrium, perfect competition, antiquarian agrarian concept, last but not least, its a great tool for abstract concepts as they relate to a complicated world, tho not the actual one we live in.

                      My2c from experience, industry sets the price i.e. administered and is highly recalcitrant to lower prices as it sees market share as an ownership issue.

                      skippy… Personally I jut like to call it the Greed-O-Matic… a tool that justifies human action in the most vulgar manner possible.

                    10. Jack King

                      Personally I jut like to call it the Greed-O-Matic… a tool that justifies human action in the most vulgar manner possible.

                      Skippy…with regard to “greed”, let me pose a question. You have a house for sale. The realtor does careful research checking comps, etc, and determines you can easily price your house a $300,000. Will you try and get that price, or will you lower it because you want to give a great deal to some stranger?

                    11. skippy

                      @ king

                      I don’t respond to hypothetical reductionist assumptions that use barter like environmental constructs.

                      Suffice to say in actual market operations things are more dynamic, but to give you a example yes I might sell lower for a number of reasons. That you think price determines all things market is silly.

                    12. skippy

                      Again… RE housing examples are a rudimentary barter couched perception of reality, and not indicative broader market dynamics.

                      Per say a RE agent might wrongly inform a seller in order to sell the property to a relative or business partner [personally know of factual cases].

                      Heaps of business run at a loss for tax purposes i.e. classic is the wife’s retail shop, but know of national franchise chains [Harvey Norman down under just won a shorting prize with this in mind], another national chain back in the day was set up just as a logistical pipe line for coke and pot, etc.

                      skippy… its always better to work with operational reality’s than resort to totally hypothetical assumptions, based on wonky notions of human nature.

                    13. Jack King

                      ” housing examples are a rudimentary barter couched perception of reality, and not indicative broader market dynamics.”

                      Not indicative of broader market dynamics?! Skippy….where are you getting this stuff? We recently had something called a housing market bubble that plunged the entire economy into a recession.

                      But what the hell….if you are willing to virtually give your house away, I’m ready to talk.

        2. John Zelnicker

          Debt needs to be distinguished between private debt and public debt, which Krugman often fails to do. Private debt is indeed a problem as Michael Hudson mentions in the previous post. Public debt, however, never needs to be a problem and Krugman refuses to acknowledge this. The Fed could pay off all US government debt tomorrow and, like QE, it would be nothing more than an asset swap, i.e., non-interest paying asset for interest paying asset.

          Asset swaps can’t be inflationary because the total amount of assets does not change. As many commenters here are aware, this is one of the important insights of MMT. As both the deficit hawks and the deficit doves (Krugman) refuse to understand, the USG debt (a liability) must be an asset to some other sector of the economy. Basic accounting identity. This surplus is the savings of the private sector (individuals and firms) as Net Financial Assets.

          If the total USG debt was paid off completely, the Net Financial Assets of the private sector would necessarily fall to zero, ignoring the current account for the moment. And, if we bring the current account back in to the equation, as Joe writes above, we end up with private savings approaching zero as the current deficit is barely enough to cover the current account surplus (exports minus imports), leaving nothing for additions to the private sector’s Net Financial Assets (savings).

          1. Bonkers

            But all monetary policy is asset swaps. If assets swaps aren’t inflationary, how are we supposed to believe that the central bank can generate inflation through monetary policy, even during normal times (when we’re not in a liquidity trap)?

            Bond purchases by the Fed are offset by excess reserves in the banking system. The Fed pays interest (currently at 0.25%) on excess reserves. So your proposition would have the Fed swapping an interest-baring asset with an interest-baring assets. Granted, the interest on excess reserves is way lower than the interest on most government debt. But it is still, essentially, government debt, isn’t it?

            1. John Zelnicker

              You are basically correct. The Fed does pay interest on excess reserves. However, they are not government debt in the way that Treasury securities are. Reserves never enter the real economy unless converted to currency. (Bank vault cash is part of reserves.) And, it’s obvious that the Fed can’t generate inflation through monetary policy; their failure to do so over the past six years is proof of that.

            2. Ignacio 2

              You are essentially right: CB’s can’t generate inflation with their current tools.
              They just pretend they can, and the financial markets pretends they can too, to a point (but that illusion is eventually driven off as you can see in Japan). Tat’s why the fill their language with obscure meaningless crap (like ‘managing long term interest rates expectations’).

              The only way they could is through ‘helicopter drops’, but they are ill-equipped to do that, only the treasury and government in general could do that.

          2. MyLessThanPrimeBeef

            I have a question about private debt.’

            Would private debt be still a problem if the government make private debt ‘too big to fail?’

            What happens if the government bails out, not just big bank’s debts, but the private debts of all of us?

            1. John Zelnicker

              It would be equivalent to a “helicopter drop”. All or most of the money now being used to pay down debt would be available for spending on real goods and services meaning a significant increase in aggregate demand which we desperately need right now.

            2. not_me

              Bailing out the population’s private debts to the banks would fix the banks too but the resulting improved economy would cause them to blow another bubble. So that should be precluded by law. Also, in the interest of fairness, non-debtors should receive an equal amount too.

              See Steve Keen’s “A Modern Debt Jubilee” (scroll down to just below “Figure 13” about halfway down the document)

              Excerpt therefrom:

              A Mod­ern Jubilee would cre­ate fiat money in the same way as with Quan­ti­ta­tive Eas­ing, but would direct that money to the bank accounts of the pub­lic with the require­ment that the first use of this money would be to reduce debt. Debtors whose debt exceeded their injec­tion would have their debt reduced but not elim­i­nated, while at the other extreme, recip­i­ents with no debt would receive a cash injec­tion into their deposit accounts.
              The broad effects of a Mod­ern Jubilee would be:
              Debtors would have their debt level reduced;
              Non-debtors would receive a cash injection;
              The value of bank assets would remain con­stant, but the dis­tri­b­u­tion would alter with debt-instruments declin­ing in value and cash assets rising;
              Bank income would fall, since debt is an income-earning asset for a bank while cash reserves are not;
              The income flows to asset-backed secu­ri­ties would fall, since a sub­stan­tial pro­por­tion of the debt back­ing such secu­ri­ties would be paid off; and
              Mem­bers of the pub­lic (both indi­vid­u­als and cor­po­ra­tions) who owned asset-backed-securities would have increased cash hold­ings out of which they could spend in lieu of the income stream from ABS’s on which they were pre­vi­ously dependent.
              Clearly there are numer­ous com­plex issues to be con­sid­ered in such a pol­icy: the scale of money cre­ation needed to have a sig­nif­i­cant pos­i­tive impact (with­out exces­sive neg­a­tive effects—there will obvi­ously be such effects, but their impor­tance should be judged against the alter­na­tive of con­tin­ued delever­ag­ing); the mechan­ics of the money cre­ation process itself (which could repli­cate those of Quan­ti­ta­tive Eas­ing, but may also require changes to the legal pro­hi­bi­tion of Reserve Banks from buy­ing gov­ern­ment bonds directly from the Trea­sury); the basis on which the funds would be dis­trib­uted to the pub­lic; man­ag­ing bank liq­uid­ity prob­lems (since though banks would not be made insol­vent by such a pol­icy, they would suf­fer sig­nif­i­cant drops in their income streams); and ensur­ing that the pro­gram did not sim­ply start another asset bubble.

              1. MyLessThanPrimeBeef

                So, private debt, in theory, or with a just government, or maybe a caring government, a government willing to act, is also not a problem, like public debt?

                1. susan the other

                  Thanks Beef for setting off this little thread. It brings into focus what we all suspect – that entrenched money does not want to let go of a situation that secures their position. The most interesting part of Steve Keen’s quote from Not-Me is the bit about preventing another mis-spent bubble with newly acquired riches. And that sort of control has always been a black hole of government responsibility – fiscally responsible decisions. Most people are so numbed out they think “fiscal” means draconian budgets, when it should mean the socially responsible use of our money. Because what else is there?

          3. Fiver

            “The Fed could pay off all US government debt tomorrow and, like QE, it would be nothing more than an asset swap, i.e., non-interest paying asset for interest paying asset. Asset swaps can’t be inflationary because the total amount of assets does not change.”

            But the value of assets does, and since everyone just had a life-long burden of funding their share of the State’s operations removed, lifted from their shoulders in an immortal instant, I’m thinking those assets’ prices in dollars will soar as we all run down to the nearest credit outlet to load up and go shopping for some nice stuff.

            1. John Zelnicker

              You are correct that there is a risk of asset inflation if too much demand suddenly floods the system, which is why a helicopter drop is not the best way to handle this. See, not-me‘s comment above at 10/11/14, 7:37 am. quoting from Steve Keens’ work.

              The economy is a complex adaptive system and simple solutions rarely, if ever, work in such a system without seriously negative unintended consequences. If we were to have a Debt Jubilee it would have to be very carefully designed so as to prevent blowing another bubble.

              And, I would hope, most people would not go right out and load up on new debt.

              Also, a minor point: “funding their share of the State’s operations” refers to taxes, not debt, and is not how the system actually works, although that is the appearance.

              1. Fiver

                The US Government and/or Fed have not been capable of ‘very carefully’ doing anything with respect to spending since the entire super-debt cycle took off nearly 2 generations ago. Please note: I am a democratic socialist, support public banks, public education, public works of all sorts, a sane regulatory system, an genuinely equitable distribution of income – the whole 9 yards. However, I note that Keynes and his adherents ignore entirely they are viewing everything from within the perspective of dominant power (UK transitioning to US during Keynes lifetime) with effective control of the global financial and trade systems. You will note that every country that has tried to forge any sort of alternative, irrespective of race, religious or myriad other factors, is subject to relentless pressures, up to and including direct attack and ‘regime change’, until that alternative fails. Without exception. But as is evident, the days of blithely exporting/importing inflation/deflation with a turn of the Fed spigot are numbered – and much else we’ve come to take as given.

        3. Joe Firestone (LetsGetitDone)

          They’re never a problem, Calgacus, because we can always mint the big coin if the level of debt starts to bother people. But apart from that the level of debt, doesn’t ever present a solvency problem, and to say, that it alone, will create an inflation problem involves some very heroic assumptions. Krugman’s assumptions relate to his loanable funds model, which we know to be false. So, what basis does he have for asserting that too high debt levels will cause a inflation problem or a solvency problem?

          1. Calgacus

            Krugman is confused, true. But debt levels being “a problem” for a government, presenting a danger of inflation is as I said, theoretically possible. They can matter, a little, but only negligibly in realistic situations. If the stock is big enough, it can cause a problematic flow more easily. If the level is high enough, and it doesn’t matter whether the debt is in the form of bonds or coins/dollars/reserves. Lerner was pretty insouciant about levels of 3000% of GDP, while confused modern dark-agers think the sky is falling with less than a tenth or twentieth of that. So as I said, it is an idle observation for practical purposes, but Lerner did make it.

      2. diptherio

        Having not read Keynes, I’ll have to ask: wasn’t he working at a time metal-backed currencies? I think that makes a large difference in the options a government has for deficit spending.

  2. not_me

    Let’s be very clear; the national debt is GOOD but paying interest* on it is BAD. Why should those with spare cash earn a risk-free nominal return, much less a risk-free real return during deflationary periods? And since real returns are much more preferable than mere nominal ones then why wouldn’t sovereign debt holders lobby against any government policy that reduces their real returns by improving the economy? Indeed, that seems to be happening in Europe, no? With the austerity advocates?

    *Indeed, past normal liquidity needs, people and businesses should be charged interest for the risk-free storage of their fiat to penalize money hoarding.

    1. diptherio

      If we had a decent, universal retirement program, I would agree. As it is, Treasuries are the safest form of retirement savings we’ve got (it would help if the Fed would raise rates a few hundred bp, of course) and a lot of people depend on them to finance their declining years. Given the other options currently available for small-time savers who need to make more than savings account returns to fund their retirement, I don’t have a problem with the paying interest on Government debt. They should also be doing direct spending to increase the money supply, not just this QE BS; but that seems unlikely to happen in the near future.

      1. not_me

        If we had a decent, universal retirement program, I would agree. diptherio

        Thanks for bringing that up and your point is very valid. We DO need a decent, universal retirement program but it should be proportional to need, not to the amount of cash one has hoarded. Let people take risks with their excess cash instead and we all should benefit as a society. But risk involves the chance of loss so we should have a decent safety net too and that safety net will encourage the risk-taking that is needed for progress.

        1. Carla

          I know it makes middle class people really uncomfortable to hear this, but tens of millions live on Social Security alone, especially since the start of the current Depression. Instead of buying the neoliberal line that Social Security is going bankrupt, etc., I suggest that individuals who want a “decent, universal retirement program” look to ways to improve and expand the existing program: removing the cap on wages subject to the tax, dramatically increasing the minimum benefit, and guaranteeing a COLA that actually reflects increased food and energy prices.

          1. not_me

            Well, except we should eliminate FICA taxes altogether since they depress the economy. But if we are to have a sound economy when people retire then why depress that economy today? How does stunting something help it in the future?

            Instead, let’s just credit citizens with working except that leaves out the self-employed so then let’s just credit citizens with SURVIVING till retirement age. One way or another we’re not going to let old people starve, are we? Except we already do reduce them to cat-food in many cases.

            1. Ian Ollmann

              Social Security and Medicare are the two largest line items on the Federal budget. Surely, you aren’t suggesting the money come from the general fund? Even if we retired the entire military industrial complex, it wouldn’t be enough.

              1. not_me

                Well then, they (FICA and Medicare taxes) should at least be reduced during recessions to keep demand up.

                And if some object that endless growth is not desirable, I disagree. Some areas of growth are harmless like education and improvements in technology make other areas less costly per capita.

    2. casino implosion

      “Why should those with spare cash earn a risk-free nominal return, much less a risk-free real return during deflationary periods?”

      Because Alexander Hamilton wanted the wealthy merchants and shipowners of the late 18th century to be committed to the new Federal govt.

  3. mmckinl

    Both Krugman and Firestone are remiss in not taking on the privately owned and operated Federal Reserve. The Fed has by the way been a raving success for their owners, the 1/10th of 1%.

    And they both fail to account for falling energy supplies. The Fed, the ECB and the BOE have been purposely engaging in austerity tactics to reduce and destroy economic demand therefore lower energy prices.

    It is the blind criticizing the blind. What we need is a sustainable economic model not the ramblings of two economists with models that tout infinite growth …

    1. Jim Haygood

      Certainly the Fed is one elephant that the two blind men don’t probe with their white canes. The other is the business cycle.

      It’s nice that a longer-than-usual expansion has driven the deficit down from 10% to 3% of GDP. However, a sustainable economy ought to generate surpluses in the latter stages of expansion, as it used to do.

      In the next recession (which I peg for planning purposes to start in 2016), the deficit will promptly soar toward 10% of GDP again, and debt-to-GDP will reach a fresh high. No one could possibly have foreseen this!

      Like their fellow blind men, these two project groaf to just chug on endlessly into the bright blue empyrean.

      1. Ben Johannson

        It’s nice that a longer-than-usual expansion has driven the deficit down from 10% to 3% of GDP.


        However, a sustainable economy ought to generate surpluses in the latter stages of expansion, as it used to do.


        In the next recession (which I peg for planning purposes to start in 2016). . .

        You’ve predicted ruinous inflation for the last seven out of five years. Oh, yeah: why?

        The deficit will promptly soar toward 10% of GDP again, and debt-to-GDP will reach a fresh high.

        We can only hope.

    2. Yves Smith Post author

      The Fed is not privately owned. Banks own non-voting preferred stock in regional Federal Reserve banks. They have no corporate governance rights. They do not have access to financial information about the Fed’s internal accounts, the right to set compensation, hire and fire CEOs, and review and approve policy changes, all of which are powers that owners of private companies have, although diffused shareholder in public companies exercise those powers at best indirectly, by electing boards. By contrast, the regional Feds are governed by the Board of Governors, which is a governmental body, and the regional Feds have advisory boards whose members include private bankers, along with members supposedly representing the public. Those boards are an artifact of the days when there was no decent economic data; they were meant to represent a group that could give the regional Feds informed input on economic conditions.

      The Fed is best viewed as a public-private hybrid. And in practice, it is clearly intellectually captured by the banks. But calling it “privately owned” enables people to dismiss those who describe the Fed that way as uninformed about how it operates and therefore not well informed enough to have a credible opinion.

      I don’t mean to seem like I am dumping on you, but if you are going to shoot at a king, you need to kill him. Calling the Fed privately owned is wide of the mark.

      1. economicminor


        Privately owned or not, they have acted outside their mandate during the last ten years at least. They act like they are a tool of the TBTF institutions who they are actually suppose to regulate. The regulators who work for the FED are certainly captured by the banks they are suppose to regulate as we heard in the Carmen Sagarra tapes. But we knew that as Geithner’s actions leading into the crisis, during the crisis and even when he was Sec. of the Treasury could only be described as excessively supportive if not out right criminal (or it should have been criminal).

        Our country says it won’t deal with terrorists and won’t pay blackmail but what did we do when Sommers and Geithner along with the TBTF banksters threatened to crash the country if we wouldn’t pay them off? And not just the bad debt but also their bonuses.

        I am not letting Congress or the President off the hook either as they are intimately involved in all these financial shenanigans and not just this recent Congress and President who compounded the problems with the FED in their passing of Dodd Frank and allowing the FED to make GS and JPM banks who could then use client money to gamble with…

        So they act like they are privately owned even though technically they aren’t.

        So what… if it quacks like a duck and walks like a duck and smells like a duck…. and you are telling us it’s not a duck?

        1. mmckinl

          Perhaps I should have said Federal Reserve System which is clearly privately operated … After all, the Fed’s operational arm is the New York Federal Bank … It’s an open secret that the TBTF banks get to place nominations then they give a choice of their picks to the POTUS for positions on the Federal Reserve Board including Chairman …

        2. psychohistorian

          I get sideways with Yves as well with my characterization of the Fed and the US money supply.

          What can be said with certainty is:

          1. The US dollar is not totally sovereign. Attempts to issue totally sovereign US money has met with assassinations.

          2. The Fed is not totally sovereign. The intention may be there to have a government controlled partnership but the reality is the reverse. And the public pays 6% for the privilege.

          But what I have learned is that this arrangement, like ongoing unfettered inheritance and accumulating ownership of property are never questioned and studied as tenets of our social organization. But we can spin all sorts of white noise like in this posting and comments discussing REAL IMPORTANT CONCEPTS…..that in my mind bear no relation to the reality behind the curtain that I see.

          1. mmckinl

            Yves describes the Fed as “captured”. In fact the Fed has never been captured as even President Wilson, who signed the Bill creating the Fed, bemoaned …

            “”I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated Governments in the civilized world no longer a Government by free opinion, no longer a Government by conviction and the vote of the majority, but a Government by the opinion and duress of a small group of dominant men.” -Woodrow Wilson, after signing the Federal Reserve into existence” ~ Woodrow Wilson

      2. Fiver

        I don’t know that I agree. Banks have been calling the shots for well over a generation now and I imagine they’ve long-since found the best strategies, tactics and amenable Fed Chairs (Greenspan, Bernanke, Geithner, Dudley one too? Yellen) and Staff, all oriented to enabling the most lucrative and smooth of possible rides for banks and networks of cronies. They were in fact engaged in a huge crime and cover-up when it came to laying the entire disastrous mess on the US taxpayer, then doing nothing whatever to run the lotta them outta Dodge. I just sort of choke, Yves, to hear it designated by you a ‘public-private’ gig.

      3. nony mouse

        sounds like the best of both worlds for neolibs–take the money and run in the good times and bad, and blame the Big Gov when things for the little people (aka “the Economy”) go bad.

        but it’s how everything seems to be run in this country these days.

      4. PeterCoop

        “Calling the Fed privately owned is wide of the mark.”
        ‘Wide of the mark’……eye of the beholder kind of thing.
        First, in discussion, what is ‘the Fed’?
        The BoGs?
        The Regionals?
        The Member Banks?
        The Federal Reserve Banking System?
        The latter being that which is the Fed, the “system” created by the Act.

        Yes, ‘the Fed’ is nothing less than the Federal Reserve Banking System, and those are some of its components.

        The Federal Reserve Banking System, that of a couple of thousand Member Banks and 12 Regional Reserve Banks, each of which is a private bankcorporation, is private in the sense that the ownership of all the banks in the system is private, and the benefits of the money powers of the banking system are private gains by those Member bankcorporations.
        The Federal Reserve Banking System.
        Privately owned.
        Privately operated for private profit.

        Are the employees of any of the Member or regional Banks public employees?
        No, they are all private employees, even those of our alleged central bank.
        Does the funding for the BoG’s come from government(public)? No.
        Who pays the salaries and expenses of the BoG’s?
        Is it not the private bankcorporates that pay for the salaries of their ‘regulators’?
        Is Green not the color of regulatory capture?

        The Fed.
        It is privately owned and controlled.
        It is privately operated.
        For private profit.
        How much more private can it get?
        The Federal Reserve Banking System is a private banking system.
        It creates private ‘money’.
        And charges the people interest to use it.
        This is a privatized money system,
        And the federal reserve is a private banking system
        Pretty much on the mark.

  4. John

    Krugman? Who?
    Stop reading, watching these tools once you know their goals are opposed to your survival.
    It’s a waste of precious time.

  5. timbers

    “Quantitative easing infinity” – Peter Schiff.

    +Give yourself to the Dark Side. It is the only way you can help your friends.” – Darth Vader.

  6. Mike666

    When you say “he’s implying”, I think you mean your going to put words in his mouth.

    Maybe should target an actual Bad Right Wing Economist to make your points in the future.

  7. RepubAnon

    In your eagerness to criticize Paul Krugman, I think that you may be misinterpreting what he’s saying. To my mind, what he’s saying is:
    * Although massive deficits can be a problem, they aren’t a problem now, and may never become a problem if minor adjustments are made now. Dr. Krugman has repeatedly noted that our current issue is underemployment.
    * Some austerity policies helped lower the budget deficit numbers currently reported. However Dr. Krugman has repeatedly noted the long-term resulting damage these policies have caused. To my mind, he’s pointing out that eliminating food purchases from the family budget can indeed lower the amount that family spends in the short run, but that the family will starve to death in the long run.

    The real problem I see is that economists (including Dr. Krugman) live in a dream world where there are no limits to growth. Unfortunately, economic theory is not consistent with the laws of physics, notably the laws of thermodynamics. Remember the law of conservation of mass/energy? For those who evaded basic physics: mass/energy cannot be created or destroyed, only its form can be changed. What this means is that there is a fixed amount of stuff on this planet. Classical economic theory was conceived in a world containing vast amounts of unexploited resources. This is no longer the case. There have always been limits to growth – now we’re starting to bump into them.

    You may also want to eliminate the Titanic Principle in your thinking ( I think it’s impossible, so I’ll just ignore it). Once someone says that a ship is “unsinkable” or that “deficits don’t matter”, they tend to act in ways where they find out that the ship can sink, and that deficits can indeed matter. It’s quite true that deficits don’t matter when we’re up against the zero lower bound, as now – but that doesn’t mean that deficits never matter under any circumstances.

    1. John Zelnicker

      It’s not that “deficits don’t matter”. The fact is that the deficit is the bookkeeping residual after accounting for government spending and taxation. It is not something that can be “targeted” in advance. Deficits do matter in that they represent the amount available for savings (individuals) and profits (firms), after the effect of the current account is considered. If the deficit is too low, we have unemployment and under-employment as we do now. If the deficit is too large for the productive capacity of the economy, it could be inflationary. That is, the ideal deficit size is that which fills the gap between the actual and potential output of the economy, again, after including the effect of the current account. Right now, that figure is somewhere between 8-10% of GDP according to various sources I have seen.

      1. John Zelnicker

        Not to be argumentative, but I found this from May 2, 2011:

        “Reagan,” Vice President Dick Cheney famously declared in 2002, “proved deficits don’t matter.” Unless, that is, a Democrat is in the White House. After all, while Ronald Reagan tripled the national debt and George W. Bush doubled it again, each Republican was rewarded with a second term in office.

        One must, of course, consider the source (Cheney).

        1. Lambert Strether

          Lots of people say lot of things, including Dick Cheney of blessed memory. MMTers do not believe that “deficits don’t matter,” despite the false talking point, propagated by detractors, that they do. So, in the context of an MMT thread, why bring this quote up at all? Random whimsy?

                1. Fiver

                  Try being Argentina (rather, most of Latin/South America, or any country in Central Europe, Central Asia, Africa, Southwest or Southeast Asia, or Indonesia) and acting as you would direct and watch how fast they are demolished. How do we account for that rationally? Why do the US/IMF etc., and the ‘market’ react so badly to such heresy or profligacy further down the capitalist chain, but allow it, say, for England, even when foreign debt is not the real problem? Seems to me the wealthy in the core always see it as ‘their’ money ‘you’re’ playing with – we ought to let them have their money, and start issuing our own.

    2. Ian Ollmann

      “Not consistent with the laws of physics”

      It is perfectly consistent with the laws of physics if we but observe that the economy is inefficient. Most of what we make is wasted. Nearly all of the solar radiation that hits the Earth is not captured by humans. Nearly all of the mass of the Earth is not used by humans. Nearly all of the space in the universe is not used by humans. There is plenty of room for improvement.

      …not that I am suggesting that pushing the limits on any of these measures is at all desirable, but physics per se is not what is limiting our economy.

      In my opinion, it is the modern can’t-do rhetoric coming mostly from the right that insists that no problem is too small that we can’t moan and tear out our hair about the cost of fixing it. Some investments are worth it. Just make sure you get a ROI.

      1. Rosario

        I would agree with you, in theory. That is my issue, it is all theory at present. We will always have room for improvement, but I’m sensing more blind optimism than measured and rational problem solving. Monetary policy will not motivate investment in rational growth and development without strong planning and legal support, thus the need for us to have more discussion around political-economy. Considering our culture’s aversion to government planning I can’t see that becoming part of the dialogue anytime soon. Say we run a public debt to decrease unemployment and increase demand (to note, I agree for the most part that public debt is a very useful tool in our modern economic model). In what? More gadgetry built with technology that was developed with government research dollars in the 50s, 60s, and 70s. More homes built on inflated prices to last only 50 years (this is a home builders/developers standard in the USA). In Capitalism, Capital is the petrol in the vehicle. Today, we obviously don’t have an issue with a lack of petrol (or ways to dispense/distribute it) it is how the vehicle is engineered.

  8. Communal

    Krugman is WRONG.
    Since dollar is pegged to OPEC oil, US debt/inflation is exported to rest of the world.

    1. Steven

      Is this correct? I thought I read somewhere that the portion of the US current accounts deficit that goes for paying its oil bills is now relatively small in the overall scheme of things.

      1. Illegal Country

        King dollar is pegged to the American military and vice versa. Without the military there would be no king dollar. Normal currency reputational risk is bypassed with the strong military of the US…the negative feedback loop/loot.

        1. Ben Johannson

          Pegging a currency to military might would mean declaring that a military might unit (or MMU, whatever that is) is worth X quantity of that currency.

          A peg is a specific thing and what you appear to be thinking of does not fit that definitiom.

  9. Steven Greenberg

    > would be enough to return to a “natural” state of full employment equilibrium

    I know Calcagus was not proposing the above, but the rest of us need to put this thought away.
    There is no “natural” state of full employment equilibrium. Even when the economy is running at
    full utilization of capital and other resources, the level of employment depends on labor force participation rates, the level of technology and automation, the length of the work week, and the evenness of the distribution of the fruits of the economy, to name a few factors.

    Whether or not there is any point in the economic cycle where there is no need for a government deficit to promote full employment depends on the factors named above and many more.

  10. Rob Lewis

    I don’t think you’re being quite fair to Mr. Krugman. I read his piece and never for a minute thought he was even tacitly endorsing austerity; on the contrary he has opposed it from Day One. And he has consistently proclaimed that it’s insane not to take advantage of today’s low interest rates to make large infrastructure investments.
    Don’t crucify him for tossing off a vague remark that well, yes, maybe the debt could become a problem at some point far in the future. Nobody really knows, do they?

    1. not_me

      yes, maybe the debt could become a problem at some point far in the future. Nobody really knows, do they? Rob Lewis

      If the national debt = net financial assets in the private sector then how can that be a problem except in how those financial assets are distributed?

      The problem is that interest is paid on the national debt and that rewards money hoarding. That could easily become a problem since progress requires risk-taking, not money hoarding.

      1. economicminor

        The problem with the national debt isn’t today at ZIRP. I will be a problem because 1/ the debt is has grown and is still growing and 2/ when interest rates rise even nominally the cost to the Treasury will grow dramatically. So even at ZIRP the carrying costs are rising and in the eventual #2……… Oh but things are different now… The FED will never let that happen…. yeah yeah yeah… forgive me if I’m not a believer.

        The worst part of the debt is that it hasn’t been invested. It has just been spent. Mostly on non essentials like losses by the TBTF gambling debts and CEO benefits or stock repurchasing programs. If you look at the *recovery* which isn’t much when looking at the broader picture. Small business ownership down. Wages flat. Revenues for many of the corporate sector flat to down.. especially retail. We have had a sell off for over a year in most commodities and gold. These things alone do more than suggest that the *recovery* is a false flag.

        This has been one of the longest stock market expansions and still no real recovery for the most part. I don’t believe what the pundits say. I look at the numbers. So $8 trillion of new debt and counting and what do we have to show for it?

        If the stock market continues to roll over. It will be like the tide receding before the Tsunami comes ashore. All the companies who borrowed to repurchase their stocks will look like fools as their stock values plummet. Isn’t that real deflation? Then what? The FED buys up the entire country with its fiat cash drawer? And then what? It will have a quadrillion dollars on its balance sheet and ownership papers for everyone’s home and all the corporation?

        I guess I’m asking, where are the limits to creating money out of thin air and using that to purchase more and more debt?

        1. Ben Johannson

          The problem is that “debt” is the wrong word. $8 trillion in Treasurys is $8 trillion in government guaranteed savings accounts. There’s nothing to pay back, although the way government’s budget is structured creates the appearance of tax dollars servicing interest payments. Those payments are determined entirely by the Fed and Treasury which control both interest rates and maturity structure.

          1. Fiver

            “There’s nothing to pay back, although the way government’s budget is structured creates the appearance of tax dollars servicing interest payments.”

            Is this intended literally? Does it mean the people who designed and built our monetary system built something by mistake? What did they intend? Whenever I see a statement like the one above (and I in no way intend to single you out) on this subject I experience a certain dissonance, in that it sounds like much of the argument re ‘modern money’ is an analysis of the operational or transactional system plumbing, i.e. what is operationally running now + the Handbook, almost as if the knowledge of the reasons for the process had long been lost – somewhere back in the Paper Days.

            1. Ben Johannson

              Government securities are an anachronism left over from the gold-standard era, in which government really did have to borrow in order to spend more than its income. When the U.S. left the gold standard during WWI it ceased borrowing and began selling those securities directly to the Fed, which was how the war was funded. There wasn’t an actual need to keep issuing them but the idea was to go back on the gold-standard after the war so the process was left in place. We went off the standard again for WWII, after which Congress changed the statute to forbid the Fed from purchasing securities directly from Treasury, to “discipline” government spending via a bond market. Only it didn’t work because the Fed can still purchase those securities via the secondary market.

              It’s just like sodomy laws or war taxes from the Spanish-American War that never get taken off the books even after a hundred years because everyone has forgotten about them or their original purpose.

        2. not_me

          when interest rates rise even nominally the cost to the Treasury will grow dramatically.

          Except the US is monetarily sovereign and has no need to pay interest in the first place. That we do so anyway is an age-old scam to benefit the rich.

          Remember? The US which was “too poor” to fund adequate relief in the 1930s suddenly had all it needed to defeat Germany and Japan simultaneously in WWII?

          1. Carla

            “Remember? The US which was “too poor” to fund adequate relief in the 1930s suddenly had all it needed to defeat Germany and Japan simultaneously in WWII?”

            Exactly the same deal now. We “can’t afford” a public health system, or alternatives to fossil fuels, or god help us, clean water in the Great Lakes. But bombing the sh*t out of the Middle East? Hiring 12 military contractors for every active duty soldier in Iraq and Afghanistan? No problemo.

        3. Efschumacher

          Well we do have something tangible to show for the additional trillions. It is the alternation of bombs and breeze blocks delivered to the Middle East.

    2. John Zelnicker

      Rob – See my comments above. One must be careful to distinguish between the national debt and the deficit. The national debt is simply the total of all deficits and surpluses of the federal government over the past 200+ years and is never a problem. As the monopoly issuer of our sovereign currency we could retire the debt tomorrow without harming the economy. It would simply be an exchange of currency for Treasury securities, an asset swap like QE. The deficit could, potentially, be a problem at some point, but we are far, far away from that eventuality.

      1. economicminor


        So let me get this straight. The Treasury goes to the FED and says we need a trillion dollars. The FED creates a note (a debt instrument) and gives the Treasury the trillion dollars. The FED can then force sell these notes (debt) to its subsidiary member banks to get the money back or just leave it on their own balance sheet. When left on their balance sheet, there is no interest accrued but it is still a note due and payable. (I assume there is no interest due either that or the FED could bankrupt the government whenever it wanted something… you know, blackmail).

        You are saying that this isn’t a problem because the sovereign (US government) could… and I should emphasize COULD just declare the note nul and void? Even the ones sold to the member banks, who have used this asset (promise to pay) on their balance sheets to lend out to corporations and FMNA and even foreign banks maybe 40-50 times that amount.. You know fractional reserve banking. And that the US government declaring this nul and void will not have any kind of real negative consequences? OR just declare the note paid in full even though it wasn’t.

        I guess I need a lesson in this version of economics so I can sleep easy at night knowing that creating money out of thin air that gives those with access to this money a huge advantage over the people actually producing real wealth in the country can have either beneficial or no real consequences.

        I know I am not the sharpest knife in the drawer so please help me understand how this concept of the debt isn’t debt and doesn’t have to be repaid because the US is a sovereign works. But the deficit is a problem? Isn’t the deficit that which creates the debt?

        1. LifelongLib

          The U.S. government is the sole legal creator of the dollar. The Fed and the Treasury are both part of the U.S. government. Whatever the specific arrangement is for creating dollars, the U.S. government does not owe anyone for doing so because it is the entity that does the creating. It spends the dollars into existence but this does not create a debt that is owed to some other entity.

          1. Sunny129

            ‘It spends the dollars into existence but this does not create a debt that is owed to some other entity’

            DEBT and CREDIT are the 2 sides of same coin. Lender and the borrower. One holds the asset and the other liability! Am I missing some thing here?

            Then why would China, Japan keep buying our DEBT, if USA (Fed) ‘does not create a debt that is owed’ Remember they have CREDITS which can be turned into REAL Hard assets like Metals, RE in USA etc

            1. John Zelnicker

              Yes, you are missing something. Spending the dollars into existence is done by keystrokes that update someone’s bank balance, e.g., a government employee’s salary or a fighter jet from Northrop-Grumman. There really is no “other side” to these dollars.

              The debt is created by the Treasury Dept., not the Fed, and is not really necessary for the government to function. It is a holdover from the time when we were on a gold standard.

              Because we import much more than we export these other countries have lots of dollars (credits, if you wish) sitting in their checking account (China’s is at Citibank, I have heard). Since they don’t need them for current spending, they would like a safe and secure place to put them that might earn them some interest. Treasury securities are just such a “savings account”. Buying and selling these securities is functionally no different than you moving your money between checking and savings accounts.

              While they can, of course, buy “hard assets” they can only redeem the dollars (credits) for other dollars.

            2. Calgacus

              You aren’t missing anything Sunny129. Debt & Credit are two sides of the same coin, two words for the same thing viewed from different perspectives. Any kind of US government dollars are a debt of the US government, and a credit to the holder. A dollar, any kind of money is a relationship, a credit/debt relationship. China & Japan are creditors of the US government whether they hold it in stacks of dollar bills, FR notes, reserves or US Treasury bonds. By holding US credit, they express their trust that US dollars will be a good store of value, that they can convert them into “real” assets some time in the future.

              The point that gets people confused is the entirely incorrect idea that when one purchases a bond from the US government with US government dollars, that you are lending to the US government. No. The inception of the credit/debt relationship, the “lending” occurred earlier, when the bond buyer acquired the dollars he buys the bond with. Bond sales are asset (liability) swaps, not borrowing, as the word “borrowing” is used in any other context.

        2. ewmayer


          You are dealing here with a particular class of Fiatopian economics dogmatists who:

          o Actually believe those 3% deficit/GDP claims by CBO, which are belied by the Treasury’s own total debt figures showing a rise of over $1 Trillion in the last fiscal year, which real-accounting numbers they airily dismiss with flummeries about “stock versus flow”;

          o Believe that “interest paid on social security” is something other than an accounting-entry fiction (were such interest ever to be actually realized, it would have to be financed by a proportional amount of new public-debt issuance, i.e. would ultimately fall – either via increased SS payins, taxes and/or currency debasement on the shoulders of the same people who “benefit from the interest on their forced savings”);

          o Government debt (erm, I mean money) issuance is a form of wealth creation, rather than a forward claim on future wealth creation used to finance current expenditures;

          o Economic production and growth can only be financed with debt, not capital, because capital implies “people are oversaving”, which is bad;

          o When the benighted rabble finally embraces MMT “government money issuance to infinity and beyond” and demands that their political leaders implement it, a hitherto unknown class of politician which does not use its newly bestowed powers of “arbitrarily large stealth taxation without adverse consequences” (via the magic of monetary debauchery) for good rather than ill will magically arise.

          It pretends to be grounded in real “main street, productive” economics, but it is an entirely government-centric, debt-fetishizing academic-wonderland theory whose implications, in the context of the very real humans who inevitably implement such things, are nothing less than appalling.

          My personal favorite piece of disingenuity repeatedly trotted out by these folks is the conceit that “MMT is nothing more than a description of how money, finance and taxation really work”. Let us assume for a moment that that were true. Is that supposed to be comforting?

          Picture, if you will, the MMT version of Donald Rumsfeld: “OK, our initial cost estimates for the Iraq war were $25 Billion, which turned out to be a factor of, oh, around 100x too low. So what? We just asked Treasury Secretary Firestone to mint a few of his magic Trillion-dollar platinum coins, and paid for the whole thing, with interest. Hey Joe, can we get 5 or 6 more as an advance for our invasion of Russia? Thanks!”

        3. Ben Johannson

          So let me get this straight. The Treasury goes to the FED and says we need a trillion dollars. The FED creates a note (a debt instrument) and gives the Treasury the trillion dollars. The FED can then force sell these notes (debt) to its subsidiary member banks to get the money back or just leave it on their own balance sheet. When left on their balance sheet, there is no interest accrued but it is still a note due and payable.

          Treasury issues a security which is then purchased by a primary dealer. The Federal Reserve ensures the primary dealer has more than sufficient reserves to make this transaction happen glitch-free. The PD then auctions the security on the secondary market where it can be purchased by anybody with access to a reserve account at the Fed including the Fed itself. If the security matures and is redeemed while on the Fed’s balance sheet it will collect the yield and remit it to the Treasury.

    3. Joe Firestone (LetsGetitDone)

      You have to look at Krugman’s pattern over many posts. His was not a casual remark. It is a trope; he always concedes the point that levels of debt that are too high can be a problem. He does this to ward off criticism from the austerians because his embrace of the loanable funds model commits him to the position that debt levels matter. But the loanable funds model is false, refuted constantly by MMT, and repudiated by its original author. Krugman clings to it because he’s invested a lot in defending it and he seems to think his prestige is at stake in sticking to the idea that there is an inter-temporal Government Budget Constraint. (IGBC)

  11. Steven

    I’ve never heard of thee SFB Model before so perhaps I have no business weighing in here. But from what I have read it sounds like some of the criticism of Krugman may not be justified. Here in Arizona Congressman Ron Barber’s opponents are running ads accusing him of voting with Obama to create jobs – IN CHINA. They don’t say what they would do differently but their point, I think, is a good one. Without some structural reforms, some control over how and for what purposes federal deficits will just pile up in foreign central banks. And sooner or later deficits WILL matter unless national accounting becomes a sick joke.

    As for full employment (FE), the only FE the Fed will ever care about is FE for money. And since the Fed and Wall Street have proven that working together there is no limit to the amount of money they can create we are going to HAVE to put the brakes on eventually. But if we are talking about FE for people, FE doing what? Invading Russia, China? Joining the ranks of civil servants like those in Homeland Security whose only real task is to ride herd over the rest of us?

    And what does FE mean? 40 – 60 hours a week for really smart, educated people like brain surgeons, etc? (I’m for that! I am pretty sure it leaves me out!) What is really needed is enough ‘effective demand’ for people to get what they need to lead lives worth living. If after three hundred years of Industrial Revolution we still insist on people working in exchange for the money they receive, maybe we can require they get together and discuss the latest Naked Capitalism postings.

    People like Firestone appear to believe the US can go on milking the reserve currency status of the US dollar forever. Maybe it’s Krugman’s background in international economics that is making him nervous on this score. I’m all for ‘saving’ – but not in the form of money. And I don’t see how price stability can be a target for a nation that no longer makes what it consumes (unless we are going to impose price controls on China). Nor do I see how we are going to get Medicare for All when newly minted doctors face repaying say a half-million dollar college debt with corporate, cost-controlled salaries.

    So as not to end on a nattering note of negativism, let me just say I am all for a ‘fiscal policy’ that targets “renewed infrastructure, re-invented energy foundations, etc”. (In that “etc”, I would include factories to produce right here in the US of A all the necessities any generation could reasonably require in order to have a quality of life worth living.)

    1. Lambert Strether

      “People like” Firestone “appear to believe” no such thing. Real resources constrain the economy, not arbitrary financial ratios like debt-to-GDP, as “sooner or later” (when?) “national accounting WILL matter” (Firestone explains how sectoral balances work).

      1. Steven

        So what are those “real resources”? They can’t be American workers because their labor is ‘too expensive’ relative to their Chinese competitors. This, of course, goes 8 – x times for selling the products of those workers to the great bulk of the Chinese people. It is probably not American oil. From what I read there never will be enough to export if we are really serious about energy independence for this country. (maybe there will be if the fracking responsible for the country’s new oil boom poisons the water for enough of its citizens)

        As to “when” deficits will matter, how about now? The Chinese, Russians and others are already negotiating bilateral currency swaps with each other. At some point, perhaps when they believe the educational level and real wealth-creating potential of this country have deteriorated to the point it is no longer capable of fielding an army to force the debt the country is creating down their throats, i.e. when they feel safe in doing so, they will say adios.

        1. Ben Johannson

          Humams are the primary resource constraint in our current envoronment, because we refuse to put them all to work. The cost of a worker in China isn’t relevant to this and exports reduce commodity resources available for domestic use.

        2. economicminor

          Real resources could be human labor but the cost of energy is actually a larger factor. The cost of energy relates to everything. The cost of farming, the cost of resource extraction, including but not limited to lumber and iron ore. It even relates to the cost of extracting more oil and gas. It relates to the ability to reasonably recycle… China has been using dirty coal for cheap energy. We are trying not to because of the green house gasses it produces.

          The US really is at war with much of the world. Some of it is with bombs and some of it is with competitive devaluation. Not many real friends out there.. Mostly competitors or outright enemies.. To me it is sick that our elected officials and unelected bureaucrats are so easily hood winked or bought off. The US is in deep trouble and no one at the top is talking truth and consequences. All are just smiley faces of corruption acting as if they care about America.

          Sure labor is a factor but as people argue here, it shouldn’t be, just print some more dollars and put every body to work. There is no debt so there are no negative consequences.

          It must be a conspiracy that is keeping the US workers unemployed as there is plenty to be done. Just go to a normal school and talk to the teachers who are overwhelmed by to much to do and not enough time plus to many students. Or go to a hospital and talk to the nurses and see what they say about more bodies.. Almost anywhere you look, we need more police so that those who are working aren’t so stressed out that they just shoot rather than think or care…

    2. Joe Firestone (LetsGetitDone)

      I don’t believe that the US’s capability to run deficits large enough to create programs that will create full employment is at all related to the dollar being the reserve currency. And I don’t care a bit whether USD remains the reserve currency or not. The rest of your comment isn’t relevant to anything I said in the post, so I won’t comment further.

  12. Bonkers

    A question, if I may. Imagine the following scenario: the US government starts to spend huge amounts of money into the economy, with the intent of lowering the unemployment rate, without regard to its deficit or debt levels. One year later the unemployment rate is down to 3% and annual inflation is at 4%. Should the government continue to run large deficits, for the purpose of lowering unemployment further (maybe even down to 0% involuntary unemployment), at the cost of pushing inflation to levels higher than 4%? I am using the number 4% because that’s where Krugman and co. have been saying our inflation target should be.

    More basically, my question is if there is an objective way to determine the optimal “inflation-unemployment balance” and if so, what would the threshold for inflation be?

    1. John Zelnicker

      You seem to be operating under the assumptions of the Phillips curve which postulates a direct relationship between unemployment and inflation and includes the concept of the non-accelerating inflation rate of unemployment (NAIRU), a concept which has been debunked by many heterodox economists.

      The limit to deficit spending is the gap between the actual and potential output of the economy as a whole (with consideration for the current account). If there is more demand (spending) by all sectors combined than the capacity of the economy to provide real resources to meet that demand, then inflation increases. This can be controlled by the level of taxation which removes spending ability from the economy and thus can reduce demand to match output capacity. While it would be impossible to accurately calculate the appropriate level of demand in advance, it can be estimated well enough to provide for a reasonable level of inflation (whatever that might be, most commonly 2-4%).

        1. John Zelnicker

          I see them as two symptoms of the same problem: Not enough aggregate demand. I’m not sure of the exact relationship between the two to be honest. But I do know that if you instituted a Job Guarantee you would reduce both unemployment and the output gap as the newly hired workers spent their wages and industry ramped up production to meet the additional demand.

    2. Lambert Strether

      Simple answers to simple questions: No, there is no objective way.

      It’s a political decision to be handled by politics. People who think there are “objective” answers to political questions are to be avoided, because their “objective” answers always favor one set of values and interests over others. That’s political.

      There is no apolitical deus ex machina — or, to put this in more modern parlance, no magic pony — that will make politics go away.

    3. Ben Johannson

      As Lambert writes there is no level at which inflation is objectively good or bad until it begins to erode aggregate standards of living. In theory an annual inflatuon rate of 8%, 12% isn’t a problem so long as incomes keep pace, until more people start buying less expensive imports; at that point inflation might become a cause of unemployment.

      1. Jim Haygood

        ‘In theory an annual inflation rate of 8%, 12% isn’t a problem so long as incomes keep pace.’

        But in practice, it is. Inflation destabilizes everything, front-loads financing costs, and is justly hated. A real-time example:

        ‘Inflation is deeply unpopular in Brazil, especially amongst the poor, and has been hovering around the maximum the government says it can tolerate [6.5%] for some time.’

        An economy with high inflation is by definition mismanaged. Dilma Rousseff may lose her bid for a second term due to popular discontent over endlessly rising prices. Jimmy Carter got booted for the same reason (whether it was his fault or not).

    4. ewmayer

      Bonkers, if you check out the recent data on trends in the cost to raise a child — about as honest and representative measure of price inflation as possible — you see that inflation has in fact been averaging over 4% for decades. Our dear leaders and the free-lunch mo-money economists who are paid to provide them political cover in the form of “learned research studies and economic models” have simply been lying their mendacious little butts off about it. As I commented when I posted the link here at the time the article appeared:

      These types of metrics are very useful in that they provide a more reliable indicator of real-price inflation than the fake-beyond-belief CPI. Here, the 10x increase since 1960 implies an average annual inflation rate of around 4.4%. As this survey does not include college education costs, factoring those in would give an even higher inflation rate.

      So the fact is, we’ve been appreciably exceeding the Fed’s (own-charter-violating) inflation target for decades, and for the bottom 90%, wages have been nowhere near to keeping pace, so an until-recently-relentless rise in private debt has been the price of maintaining the illusion of a decent lifestyle for the non-elites. This is the US-style central-planning debt serfdom Michael Hudson mentioned in his essay here yesterday.

    5. Joe Firestone (LetsGetitDone)

      Scenarios may be conceivable, but that doesn’t mean they reflect proper economic policy. The MMT position is that full employment should be created by passing a federal Job Guarantee program, and price stability should be achieved by doing this as well because the JG at a living wage will be a hedge against inflation. Other weapons against inflation include taxation and wage and price controls. MMT’s goal is full employment at a living wage with zero percent inflation, not near full employment with 4% inflation. Krugman is stuck in the latter box because he won’t advocate direct job creation to create full employment, and instead advocates for top-down stimulation of the economy.

  13. MyLessThanPrimeBeef

    Public debt can be a problem if the government can simply create money itself out of thin air, because the citizens will ask why.

    Why borrow? The question become a problem for public debt.

    Why borrow indeed, and be subjected to humiliations like, ‘well, you can always borrow more, but this calls into question the efficiency of your imperial adventures?’ On the other hand, you don’t have that problem if you create money out of thin air.

    While creating money like that is not a problem for the global reserve currency empire, it can be nettlesome for smaller countries. A small country has to worry about what its international ‘friends’ think of the prudence of its money creation. The judgment can be quite harsh, especially if it needs to import essentials like oil, AIDS or Ebola drugs.

      1. MyLessThanPrimeBeef

        Didn’t they say we were going to turn swords into ploughshares, and drones into delivery flying robots?

    1. Rosario

      And another question, who borrows? In an ideal world everyone could borrow just as easily at the same fair rates for rational productive endeavors, rather, because we live in the real world with corruption, the wealthy, etc. this doesn’t happen. Here I return to the problems presented by reality. Monetary theory quickly becomes a dogma for gluttonous priests wishing to perpetuate their lifestyles. I feel like the past six years should give us a moment of pause. What matter is increased Capital/liquidity without market direction or regulation? These are political and cultural problems not monetary ones.

  14. DCR

    Are both the authors and most of the commenters blind to the current real world catastrophe that their advocated policies are creating in Japan. Despite massive annual deficits for decades, massive government “investment”, and a colossal national debt, real incomes of the middle class are collapsing as the currency declines and the price of imports soars, while private investment in productive capital wanes. Very soon the “savings” of the nation, as represented by JGBs which have no chance whatsoever of being serviced by real economic activity, will be revealed to be the fiction they are and there will be a mass unsuccessful attempt to exit the burning theater of uber-Keynesian folly. The insanity of believing that real economic progress comes from government borrowing and money-printing rather than effort of private labor and private capital formation is why the global economy is as tepid as it is, and is destined to get far worse if the authors of this piece get their way.

    1. Mike666

      You’re misrepresenting the Japan problem.
      They practices austerity for 20 years and got nowhere.
      Only now are they attempting to stimulate their economy.

      1. Robert Frances

        Japan has tried for 30 years to get their economy on track with deficit spending, partly by building roads through pristine, beautiful areas in order to “create” jobs for their very well-compensated road contractors and their powerful employee unions. Rents and taxes are even higher in some parts of Japan than most places in the US, even though wages and salaries are comparable to the US. Thus, people have even less net disposable income than in the US and Europe after paying taxes and high housing costs. With their relatively recent addition of VAT taxes, there’s even less disposable income for the purchase of goods and services, retarding the economy even more. Young people have been emigrating out of the country at an increasing pace because there is little economic upside in the country, much like the US where increasing taxes and high housing costs have suffocated the economy.

        In the early 1980’s when real estate prices collapsed in the US and Japan, the Japanese government let their banks keep the overvalued assets on their books so that US and European vulture funds didn’t scoop in and buy them (unlike the US where the real estate assets of bankrupt Savings and Loans were sold to vulture funds for pennies on the dollar.) This may have been a decent policy for a (partly) xenophobic country to prevent valuable assets (ie, Tokyo and Osaka commercial real estate) from being sold off to foreigners, but these overvalued real estate assets continue to cripple the economy decades later. I like Japan a lot and may even live there again one day, but it’s one of the better examples to show why deficit spending and crony capitalism are terrible long-term policies for the bottom 2/3 of society regardless of the country. With an aging population and a reluctance to let in foreigners, their demographic trends and fiscal prospects are bleak.

    2. Ben Johannson

      1) Japan has not run massive annual deficits; to the contrary their fiscal policies have been quite conservative.

      2) Why should we care about Japan’s national debt?

      3) Falling value of the yen in FX markets is the goal. They want imports to get more expensive.

      4) Private investment grew stronger in every decade for Japan until an incident called the Global Financial Crash. Perhaps you’ve heard of it?

      1. Jim Haygood

        Because at 227.9 percent of GDP, Japan’s debt will be impossible to service if nominal interest rates ever rise. At even a modest 3% yield (versus about 0.25% now as an average on all outstanding maturities), Japan would be paying nearly 7 percent of GDP in annual debt service.

        Nobody knows when this particular bucket of kerosene is going to blow up. They keep throwing matches into it, but the damned stuff just won’t ignite. When it does, Japan likely will enter hyperinflationary burnout in a hurry, followed by default. Or perhaps an Asian war will come to the rescue …

        1. Ben Johannson

          The Japanese government controls interest rated and maturity structure while the Bank of Japan pays interest by marking up the appropriate accounts. Insolvency is not possible.

          1. DCR

            While your “facts” about Japan are completely false, the easiest way for you to discern the effectiveness of your economic prescriptions is to ask the Zimbabweans, or more recently the Venezuelans and Argentinians, how much fun is a currency collapse.

              1. Ben Johannson

                It’s an interesting argument that to discover facts about Japan we are supposed ignore it and look to Zimbabwe instead.

                  1. craazyboy

                    If you play along with the game, the central bank will loan you free money* and allow you to use 100:1 leverage so you can buy lots and lots of long maturity, 1%, government debt and make a ton of money. That keeps the private financial system supportive of the bonds and the currency they are denominated in. It also helps to have a trade surplus so the real world is supportive as well.

                    If you’re an important person. If not, you get ZIRP.

                    News at 6:00 if this ever changes.

                    “That’s the way it works now”, as MMTers are prone to say.

                    *And collapse “free market” short term rates with the shear volume of “liquidity”.

    3. Joe Firestone (LetsGetitDone)

      MMT-based policies are not used in Japan. Had they been, Japan would not have had two plus decades of stagnation. It’s as simple as that. What makes you think Japan is an example of MMT-based policy gone awry?

      There is one thing about Japan to emphasize however. Pundits have been predicting runaway inflation for Japan since the debt-to-GDP ration reached 100%. It’s now at roughly 229%. So, where’s the runaway inflation? If it’s not there it means that the models predicting inflation for so long are false. So stop using them! They just don’t fit the real world.

  15. Benedict@Large

    Presumably, by reporting the lower deficit as he has, Krugman is saying he agrees that cutting the deficit is a good thing. Which is what makes him, the designated left boundary of the Overton Window, the best weapon in economics that the right wing has, and the worst enemy of the left. The social state REQUIRES deficit spending, and the right’s supposed hatred of deficit spending isn’t at based on some supposed sound economic reasoning, but rather because of its hatred of the social state itself. By signaling his general disagreement with deficit spending, Krugman is effectively discarding the social state.

  16. PopeRatzo

    Is the author suggesting that “the deficit” and “the debt” are the same thing? The headline refers to debt, but Krugman’s concern is countered with talk about the deficit.

    I’m asking because I really don’t know the answer.

    1. John Zelnicker

      The national debt is the sum of all deficits and surpluses since the founding of our government 225 years ago.

    2. Joe Firestone (LetsGetitDone)

      Krugman knows that the deficit and the debt are different, but have been closely associated for a very long time now, but in this post he’s conflating the two and associating deficit spending with necessarily driving the debt up higher, and is also retaining the conventional wisdom that “teh debt” may become a serious problem.

  17. psychohistorian

    All these comments and no talk about a debt jubilee. I think if we are going to keep the same class structure with the global elite owning everything then a debt reset is the only way to continue the anti-evolutionary stupidity we have now.

    I see the current world debt situation to be mankind’s current tower of Babel. It needs to be torn down.

  18. Rosario

    I don’t care what the theories say. Continuous material debt (as opposed to social or relational debt) is unsustainable and irresponsible. This coming from a burning leftist constantly at odds with the modern libertarianism prevalent in this the USA. A dash of lucidity would do the world some good right now. I suppose I don’t see the mystical capacity of any economic system to optimize itself when it doesn’t even relate its legality, politics, and concept of debt to the natural world around it. What of ecology, resources? Do we desire growth for improvement and out of necessity or just for the sake of growth itself?

      1. Rosario

        It is material, its effects are felt everyday. Day to day economic transactions do not follow rules to balance equations, they operate within the confines of law and politics, currency is a tool of political-economy. Where is the direction coming from, mathematicians working within banking institutions? The issue is, someone has to make that keystroke, and the assumption is they are intelligent/rational, and they are ethical/moral (I’m one to think Plato’s philosopher-king was a bit of lucid satire). That is a stretch for any institution that has the power to direct wealth “at a keystroke”. When will the theory work, all the tools are there, as are the institutions? I feel like we have passed three strikes for monetary policy directing the “real” economy (89, 00, 08). I’m not seeing a point in the future when humans stop behaving in a self interested way particularly when it is so easy to do so. Try something else.

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