Home > Main > Paul Krugman does not get MMT. But he will take the plunge today.

Paul Krugman does not get MMT. But he will take the plunge today.

August 11, 2011

Paul Krugman goes after MMT again today.[h/t to the tireless Prag Cap]

Fortunately, the example he provides is basically a great supporting historical fact for MMT.  France had a bout of inflation after a huge runup in debt.

Since the franc was a sovereign currency, there was no chance of default.  But of course, there was the potential for inflation.

After people changed their savings preferences, the value of the French franc plummeted.  The reason why people changed their franc savings preferences lower is not as important as the change itself.

This is exactly what MMT says can happen.

This gets back to my rant about Solvency and Debasement.

Debasement is possible.  Insolvency is impossible.  Insolvency is not possible even if people believe its possible.

The consequences of this distinction are huge – thanks again SWR:

“[T]he impossibility of insolvency does not mean the fiat currency will have value. A government might be fully solvent even with a worthless currency… This distinction between insolvency and debasement is at the heart of MMT…

Why is the Traders Crucible going nuts…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.

We cannot directly observe the risk of insolvency — it must be inferred from bond price action… the resulting process is one of guesswork, misstatements, boneheaded plans, wild specualtion, and dumbassery, because there is no way to observe the risk of insolvency directly even though it is one of the ideas that govern our spending. …

[B]y removing the fear of insolvency, we can more directly observe the risk of debasement…

[W]e don’t need to rely on the bond market to “give us signals” about the potential loss of access to their club to determine if we need to lower spending, or raise spending. We can just witness inflation and unemployment and make decisions on these two variables, instead of the three variables of unemployment, inflation, and insolvency… This is a much simpler task, and is perhaps the core strength of the MMT paradigm.”

I left a message there, I hope he clicks through.

[Update:  Mosler has an awesome rant on a similar topic. But you already knew this.]

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  1. wh10
    August 11, 2011 at 11:27 am

    Why did France ‘just print’ instead of issue debt commensurate with spending?

    Furthermore, was this sovereign debt or foreign?

  2. August 11, 2011 at 1:31 pm

    According to this:


    the French Treasury and Central Bank were at loggerheads and there were regular interventions.

    “To conclude, we must obviously emphasise that the existence
    of these actions in the foreign exchange-market leads us to
    reconsider the hypothesis of exogeneity of the monetary base in
    France in the mid-1920’s and leads us to to reject the conventional
    view of the existence of a perfectly pure floating regime at this
    period. These interventions should not be overlooked and the
    French Franc is not as it is traditionally presented, the archetype of
    a floating currency. “

  3. beowulf
    August 11, 2011 at 5:25 pm

    Wh10, can’t recommend highly enough Liaquat Ahamed’s book Lords of Finance.

    “The book discuss the personal histories of the four heads of the Central Banks of the United States, Great Britain, France, and Germany and their efforts to steer the world economy from the period during the First World War until the Great Depression. The book also discusses at length the career of the British economist John Maynard Keynes who criticized many of the policies of the heads of the Central Banks during this time…. On September 2, 2010, Chairman of the Federal Reserve Ben Bernanke was asked by the Financial Crisis Inquiry Commission what books or academic papers he would recommend to understand the financial crisis of 2007–2010. The only book that Bernanke recommended was Lords of Finance.”

    • wh10
      August 11, 2011 at 5:38 pm

      Awesome, thanks beowulf.

  4. beowulf
    August 11, 2011 at 7:54 pm

    Wh10, One of the points of that book was that that war debt overhang screwed up the global economy. Everyone should have stayed off the gold standard and just written off each other”s debts. Most countries just stopped paying their war debts when the Depression started. At the time it stopped buying in the early 1930s, the United Kingdom owed $4.3 billion at an interest rate of 3.5%. Or rather still owes, the UK has never repudiated it and the US has never written off. Par value plus accrued interest, almost $50 billion today. And yes, I believe uniquely for UK debt, its payable in dollars, not pound sterling.

    Anyway, reading that book while Gordon Brown was pestering Iceland for bank money (last payment demand Icelandic voters rejected was $5.2 billion). It occurred to me the obvious solution to that problem would be for Tsy to unload some very stale debt to Iceland ( at a price of, say, 1% of par), in particular, that odd stash of “Sixty-two year 3 -3 1/2 per cent Gold Bonds” in the vaults. I truly would’ve loved seeing Gordon Brown’s reaction to that turn of events.

  5. beowulf
    August 11, 2011 at 8:09 pm

    I don’t mean to give offense to Neil. I was expressing an anti-Brown sentiment, not an anti-UK one. Certainly, its absurd the US didn’t written off any outstanding UK war debts after Wold War II for both conflicts. If for domestic political reasons the US govt couldn’t, the very least Tsy should’ve done is state that WW II debt repayment would satisfy all war debt claims and accept payment in pounds instead of dollars.

    • August 12, 2011 at 2:17 am

      Don’t worry, I’m not easily offended. I hope I have the ability to see others points of view. Offence generally only happens when you can’t.

      If reports on the UK side are to be believed the UK Treasury can’t even work out who owes the UK for first world war debts.

      I can’t find the WWI US bonds on the UK balance sheet anywhere.

      • beowulf
        August 13, 2011 at 1:33 pm

        OK, glad to hear. I came across this rather curious 2002 parliamentary inquiry, the third of its six questions:
        “what the level is of First World War debt owed by the United Kingdom to the United States of America; in what year repayments were last made to the USA; and what plans he has to (a) pay off the debt and (b) cancel liability to this debt;”

        I had to look up the MP (Bob Spink), his unusually detailed questions sound like something Ron Paul would ask to torment Ben Bernanke… Ha ha, this guy should start the British version of the Tea Party (East India Tea Company Party?). :o)
        “What bit of ‘send them back’ don’t you understand Mr Blair?”… He is against research into animal chimeras and refers to those involved in or supporting human bioengineering as “dark forces”.

  6. August 11, 2011 at 8:40 pm

    Thanks, TC. I have referenced this quote of yours myself.

    Beowulf– I just ordered “Lords of Finance” for my Kindle. Thanks for the recommendation…

  7. Clonal Antibody
    August 14, 2011 at 4:10 pm

    Bill Black weighs in on this – Anti “MMT Types” Memes Migrate to Stage II

  8. Clonal Antibody
    August 15, 2011 at 10:14 am

    It appears from Multiplier Effect that Krugman was in fact replying to James Galbraith’s TNR article – “Stop Panicking About Our Long-Term Deficit Problem. We Don’t Have One.” Also some reactions from Arnold Kling (JG responds briefly to the latter in comments).

  9. beowulf
    August 15, 2011 at 1:41 pm
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