Posted by: Dirk | May 7, 2013

Wray: Paul Krugman turns to MMT

At EconoMonitor, Randall Wray notes that Paul Krugman has turned around from “creating more government debt in good times can cause hyperinflation” to “no, it cannot if the authorities do not want to (and why should they?)” (my words, no quotes). Here is the Krugman quote from 2 days ago as presented by Wray:

Remember, Britain has its own currency, which means that it can’t run out of cash. Furthermore, the short-term interest rate is set by the Bank of England. And the long-term rate, to a first approximation, is a weighted average of expected future short-term rates. Unless markets believe that Britain is going to default — which it isn’t, and they won’t — this is more or less an arbitrage condition that ties down the long run rate no matter what happens to confidence. Or to be a bit more precise, it’s hard to see what would drive up long rates except a belief that the BoE will raise short rates; and why would it do that unless it sees economic recovery in prospect?

And Wray also points us to what Krugman said before: “once we’re no longer in a liquidity trap, running large deficits without access to bond markets is a recipe for very high inflation, perhaps even hyperinflation”. Krugman had already pointed out that the US had the wrong debate, talking about the deficit instead of unemployment, but this new development should lead to a louder outcry against the sequester.

I don’t like to use metaphors, but the economic woes in the US and even more so in Europe are self-imposed. If you want to increase employment and GDP the government can do so. In the US the rules would allow it, even though the debt ceiling should probably be cancelled because it enables political blackmail. In the euro zone, the ECB would have to be allowed to directly finance governments. So, the US basically is one good idea away from a return to economic growth while in Europe there is the need for one good idea plus one European dream to fix the situation. The euro needs to be backed up by a fiscal component that helps countries in distress. Now it would put Germany into a position where she pays, but who knows where the next bubble develops? Enlightened self-interest should lead to a pan-European insurance scheme in which parts of demand are financed via Brussels. Why not put pension systems on a pan-European basis so that national governments cannot through budget cuts remove demand from an economy which already has a demand side problem?

Oh, by the way: I wonder when Paul Krugman will take over the idea of endogenous money.


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