Home > Main > Paul Krugman, just read this post

Paul Krugman, just read this post

April 21, 2011

Hi PK,

Hope all is well. You say you don’t “get” MMT :

Does the same thing hold true for the federal government? Well, the feds have the Fed, which can print money. But there are constraints on that, too — they’re not as sharp as the constraints on governments that can’t print money, but too much reliance on the printing press leads to unacceptable inflation. (Cue the MMT people — but after repeated discussions, I still don’t get how they sidestep the issue of limits on seignorage.)

We don’t sidestep the limits of seignorage.  We just recognize the limits of seignorage are the only limits. We recognize the limits of seignorage are self-imposed.  There is no bogey-man of insolvency in the closet, waiting to throw extra inflation upon us.

The “unacceptable inflation” of your concern results from the assumption of a possibility of insolvency.  Take away the assumption of insolvency, and what remains is inflation. We can observe inflation.

We can debate the proper level of inflation.  That level could be 20% or 2% or 200% or 0% or -5%.     Personally, I would be very much against a 20%  or 200% inflation rate. But 20% inflation will not cause us to go broke, because we cannot go broke!   It would just be 20% inflation.

We have a self-imposed inflation constraint.  And Inflation is observable.

Here is a crucial distinction for MMT:

…This is just a way of saying that a debt that is affordable at 4% interest may not be affordable at 20% interest, because of the solvency constraint. So using the tool of the printing press is a defacto admission of insolvency, therefore bypassing the bond market must trigger currency debasement. But these two ideas – the interest on the government debt and the debasement of a currency – cannot be linked through solvency, because governments issuing debt in their own currency cannot become insolvent.  Therefore, losing access to the bond markets isn’t the cause currency debasement, because the link of insolvency is impossible.

It does’t matter what the interest rate is on government debt, the government cannot become insolvent. It could be 1000000%.   There is no point where the yields on bonds cause a run that results in the government not being able to issue more money.

Now, by this point, you must be thinking – why in the hell is he concerned with this difference?  Any interest rate of 100000% would be debasing the currency like Zimbabwe on steriods!  Why is the Traders Crucible going nuts over how many Angels are dancing[sic “on the head of a pin, and”] about the difference between insolvency and debasement?

Well, we can directly observe the debasement of a currency  in an economy through the inflation rate. We can directly observe the process of debasement and loss of value of the currency through inflation.  

[Update: Tom Hickey responds too.]

[Update: Mr. Krugman, if you read this, I have a question.  What percentage of the text of the culture novels are about the responsibilities of gods? 🙂 ]

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  1. Detroit Dan
    April 21, 2011 at 5:44 pm

    Krugman is not speaking (or thinking) clearly, which is ironic in that he ends his post with the following:

    “Discussions like this really disturb me; they indicate that there are a lot of people with Ph.D.s in economics who can throw around a lot of jargon, but when push comes to shove, have no coherent picture whatsoever of how the pieces fit together.”

    • TC
      April 21, 2011 at 7:29 pm

      No kidding – the entire economics profession seems as though to think Occam’s razor doesn’t apply to economics. And lol on the ironic PHD quote

  2. beowulf
    April 21, 2011 at 11:36 pm

    Ironically, one of the most lucid writers about economics, Matt Yglesias, not only lacks an Econ PhD but admitted recently he’d never taken so much as a single college economics course (ha ha, neither did I).

    Maybe like what Marine drill instructors say, its easier to teach marksmanship to recruits who’ve never picked up a gun before sinxw they don’t have bad habits to unlearn. :o)

    • TC
      April 22, 2011 at 7:22 am

      Matt Y is a sharp guy…

      and you’ve never taken an econ course? Wow. Thats impressive – you have a great grasp of the literature.

      I haven’t either, but I have a huge financial background, including letters after my name.

  3. Peter D
    April 21, 2011 at 11:43 pm

    But it does scare me that most of the MMT foot soldiers out there are a bunch of dilettantes like myself. I cannot find guts to tell somebody like Nick Rowe or Krugman “you don’t get it”, because I never spent years thinking about these things to be sure that it is not I who doesn’t really get it.

    • June 10, 2012 at 9:53 pm

      I like the video, two different narvatires out of an economic and economistic view on the state of the society (and the state and the society). I don’t agree with the interpretation of Ludwig Mises about the fall of the Roman Empire. If you can conquer something or otherwise gain enough supply of basic resources you could go on printing (or minting) money. And you got to have the people to run your domain.Fiat Money: There could be a certain trickle-down’ effect with it. You can make risky right up to (at least medium-term) free-floating virtual investments . The corresponding economic system to this is (partly not all activities are uncovered but fundamentally) made possible and being maintained by (asset and consumer prize) inflation. In the course of that, the state receives fiscal revenues and people are getting (from time to time, e.g. in the boom phases or after a bust) attractive and affordable offers for example in the real estate sector. Of course this is accompanied by hazards, like every investment in property (in every form of society, partially differing by the kinds of risks). So the middle class has to choose well where to invest in the boom or the bust phases or in the slackened times in between of a fiat money-organized economy (affecting the whole society).People who don’t have the socio-structural biography and position to accumulate capital or just don’t want to will maybe also gain by some investments that wouldn’t have been made without the less restrictive fiat money supply. Also a lot of welfare state programs like especially those for the elder and the sick fellows are today financed within the fiat money system. That maybe doesn’t necessarily have to be this way. But it is established and seems to be fitting to the (abstractly summarized) societal basis structure’ as it is today.I am not a complete utilitarian but one could say: As long as there is a certain gain for the society in general, maintaining a (the respective current) system could be reasonable. This gain could be seen solely financially: If someone loses less by inflation than gaining by other effects. Or, more holistically: If a society can be organized by the people with the trust in a certain stability its ok if there is paper money as a lube as it would be if there was gold as the orientation standard or competing currencies.Currently we are experiencing a turmoil phase of the societal aggregate state. In this flexible’ times we’ll have to wait, see and adapt ourselves to the upcoming new basis structure(s). If there will be a new economic system as in one way or another Occupy Wall Street or Libertarians are hoping for will emerge in the upcoming years. The form and with which symbols (e.g. property, intellectual property, possession, etc.) the new organization structures (in politics, economy, and other fields of society) will re-structure and re-establish is currently open’ (in the sense of not concretely predictable for us). We are living in somehow exciting times.

  4. apj
    April 22, 2011 at 8:09 am

    “foot soldiers” with open and enquiring minds…..big difference…..and engaged in the scholarship of some very serious minds, many of whom DO have a few letters after their names.

    I went through university wondering about the seemingly arbitrary split between monetary and fiscal policies….could never understand why bond financing wasn’t merely a monetary operation!

    • TC
      April 22, 2011 at 8:31 am

      Read this post I called “what a jerk” and go read that paper, and the paper it uses as a source. It’s a conspiracy.


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