Here’s the question: Can the custodian of the world’s reserve currency keep running deficits to the end of time with no downside to its economy? Here’s one answer:
Paul Krugman was asked whether he thought the U.S. was ‘in danger of a collapse, a stall, a crisis.’
‘No, there’s a whole bunch of reasons why that’s not true. First of all … that trillion dollar deficit is overwhelmingly the result of a depressed economy, and when the economy’s depressed, it’s good to run a deficit. You don’t want the government to try and balance its budget right now,’ Krugman said.
C-SPAN showed a video of former GOP vice presidential candidate Rep. Paul Ryan (R-Wis.), speaking at the National Review Institute in Washington, D.C., on dangers of debt.
‘We spend a trillion dollars more than we take in each year. We can’t keep that up. If we stay on this path, we will run the risk of a debt crisis. What is that? That’s a moment where our finances collapse, our economy stalls. We will have to convince the country to change course,’ Ryan said.
‘The story Ryan is trying to tell just doesn’t actually make sense. There are no historical counterparts to the story he claims we’re at risk of, and of course, Ryan himself desperately, desperately is concerned about the deficit but won’t accept one penny in additional revenue to deal with it,’ said Krugman, winner of the Nobel prize in economics and author of End This Depression Now.
‘All he really wants is to cut spending. If it comes to making any sacrifice on what he cares about, which is taxes, he’s not willing to make that sacrifice,’ added Krugman.
Watch the video here. But is there an actual reason – some economic theory, say – that explains why the US won’t turn into Zimbabwe or the Germany of 1921 if it keeps printing money with no productivity to back it up? Bizarre.
Running deficits to spend on handouts and unproductive investments is bad – we’re all agreed on that.
But as for the money printing comment, Steve, I’m afraid that until you properly read and really understand Friedman, Sumner and co, you will continue to flail about in your clueless (mis)understanding of macroeconomics. Look, Japan has been printing money for decades and no hyperinflation. In fact, they’ve had almost continual deflation (based on the GDP deflator). What determines hyperinflation is the stance of monetary policy and neither the level of interest rates nor the absolute amount of QE tells you that. As Friedman said:
There are plenty of part-precedents for current Us policy in Germany(1920s), Zimbabwe (recently) and Argentina (all the time). There is no precedent for the world reserve currency to be debauched.
This is either very frightening, or very interesting depending on your point of view.
its simple. the debt is paid for with bonds. the market must loose faith through government income collapsing or not being reliable. this hasnt happened. revenue still hovers around 2006 levels. people dont fear the debt, they fear collapse in the only thing that can possibly repay the debt.
once the economy stalls in the usa and revenue collapses then we willl see mass inflation. the fed can try and manipulate the bond rate but it wont matter.
zimbabwe had the same system. it worked right throught the 80s and 90s, the hyper inflation trigger was revenue collapse causeing no kne to buy bonds.
If you’re predicting inflation, and it doesn’t eventuate, what should you do:
1 insist it is just around the corner; or
2 wonder if maybe the current policy is prevent deflation?
Here’s Sumner discussing John Taylor’s latest views:
http://www.themoneyillusion.com/?p=19091
The Nobel Peace prize was utterly bastardised when it was given to the guy with the white mum for doing nothing. Further soiled by the unflushed toilet known as the IPCC. Now I see a Nobel Laureate blathering stuff that’s so obviously bull that even I can pick it. My year three swimming certificate is looking good after all.
I saw Krugman interviewed while I was in the US in Mid January.
His answer to debt crisis was simple.
US can cannot go into default or have a crisis of investor confidence because unlike the European countries, it can print as much money as it likes. If dollar depreciates, then all the better for its export competitiveness.
I swear that was it.
No plan whatsoever to pay the debt off.
So, its official – US will simply depreciate away its dollar and its debt.
Investors can’t say they were not told.
The cause of the stagnation isn’t so-called tight monetary policy, after all the money base is currently sitting at 2.8 trillion, according to the St Louis Fed.
The problem is private sector balance sheets, namely households. Monetary policy is relatively ineffective when the transmission mechanism is impaired.
The most effective way of injecting cash into the private sector in these conditions is through deficit spending.
agree sdfc
The problem with the low tax low government spending mentality is that there is a ratchet effect – lower taxes = less govt spending = less expansion for private sector firms if fewer government projects = less transfer payments for the afflicted = output gap stabilisers smashed up = Y down
and we all sit here scratching our heads and saying WTF happened Y was supposed to go up?
You know there is a lesson in this. You can ask the business lobby how they would fix the economy but they are really only acting out of self interest or ficuciary duty to shareholders and dopt the view that tax is an impediment to gowth or progess and they would have us all think the same(they have to try that on – thats the way they are).
I’m talking about the conditions of financial crisis Alice. Taxes and government spending over the long run is a different issue.
The main issue here is the monetization of government debt that is used to finance unproductive expenditure – essentially consumption expenditure. Problems arise through the structural distortions this creates. I agree with Lars Christensen – the US needs a balanced budget and monetary expansion, based on well defined and communicated rules. It is the discretionary (and often confusing and inconsistent) rhetoric and actions from the Fed that is making current efforts at monetary expansion ineffective.
Just how is reducing private sector income during a slump supposed to be anything other than a disaster.
This really annoys me when people think that the government is the only source of contracts and projects.
The reality is that a government project will waste twice as much money, and therefore create half as much employment as the money spent wisely.
Why does anyone believe that taking money off people and spending it in their name creates economic growth, but leaving people to spend it themselves somehow reduces growth? It’s a ridiculous position. The usual excuse is ‘OMG HOARDING’ when the answer is, unless you’re burying notes in the backyard like a union thug, you’re not hoarding, you’re providing capital for use by someone else, hopefully wisely.
We all think that we should have mild inflation to ensure people don’t save money. But saving money is the pre-cursor to any type of investment. Inflation harms creditors and benefits debtors, and somehow this is an unimpeachable rule of goodness(TM). It’s as stupid as saying that a high exchange rate is better than a low exchange rate, or the other way around. Neither is inherently better, each advantages and disadvantages different groups.
Deficit spending takes money off no one, it creates money.
But does not create wealth.
Ever.
Wealth is a function of income.
No, wealth is a function of saving income not spent.
There is no saving without income.
So what then is income? The residual of something one produced when exchanged for something another produced.
You need to wait to see how this plays out. Previously the Fed was shooting itself in the foot. Every time inflation expectations inched up they would be there reminding people that they would act to protect the 2% target, thereby basically signalling their QE action would be resisted.
They have now said they will not act until the unemployment rate gets to 6.5% and even then they may not. This is a huge change in monetary policy management.
Explain it.
Bullshit.
Income always positive SDFC, and if negative, it’s a loss.
So in the bartering situation we are faced with ?????
My expenditure is your income Louis. GDP(E) = GDP(I).
JC
Growth has been largely debt fuelled over the past decade or so. There simply has not been enough deleveraging in the economy to permit a return to high levels of debt growth on a sustained basis.
The US and the remainder of the developed economies are locked into an extended period of sluggish growth and high unemployment.
Deficit spending is a direct monetary injection into the economy.
Wealth is a function of past income not spent on consumption. FTFY.
You ignore the time dimension sdfc.
Income is a function of expenditure. No I do not ignore the time dimension. Time is continuous.
And expenditure is a function of income of course.
In the US? sure there has been. They about 75% of the way through.
Household debt is still north of 80% of GDP.
They’re fucked without a reflation of their economy enough to get that debt level down.
To accumulate wealth, you must defer consumption. Bloody oath you are ignoring time.
No I’m not Skuter, wealth is a function of income. Investment is a function of prospective income.
Is anyone who matters over there talking about deregulating to boost investment, employment and productivity? Slashing and burning red and green tape?
“Is anyone who matters over there talking about deregulating to boost investment, employment and productivity? Slashing and burning red and green tape?”
Aside from a couple of unelectables Rand PAUL etc, NO. The republicans either don’t believe in it or are too scared to say it. Personally I think they don’t want to do what has to be done.
Did Reagan loudly advocate what he thought needed doing in the run up to his election? Thatcher knew that Leyland had to die but she publicly supported it until she was in a position to let it die.
Most of the incumbent and would be Republicans and Democrats don’t understand why much less what is required. Things in the US are going to get much worse for a long time.
Mundi is sort of right, the party will go for as long as bond buyers think that they will be paid in a worthwhile form. If they doubt they will be paid or that they will receive payment in a useless currency then the party will end fairly quickly.
sdfc, deficit spending works against deleveraging. Debt is debt, doesn’t matter who holds it.
“But does not create wealth.
Ever.”
So LH, if the govt borrows money for deficit spending and builds a power station, is wealth created or not?
The problem with not thinking is you say dumb stuff. The problem with deficit spending depends on that nature of the spending and the trajectory of the deficit. If the govt going to build infrastructure, during a recession is a great time to do it. The main problem is that recessions usually don’t last too long and you can’t predict when they’ll start, so “shovel-ready” stuff ends up being junk.
sdfc seems to think there is value in any type of deficit spending, the classic keynesian burying jars of money. The evidence for that is lacking.
Pedro
sdfc, deficit spending works against deleveraging. Debt is debt, doesn’t matter who holds it.
Exactly. That’s why running a deficit is exactly what a government should do when the credit transmission mechanism is impaired. By holds it I assume you mean whose liability it is.
Whether the public sector is in deficit or surplus is just a representation of the balance of payments between the public and private sectors. defici spending does not necessarily rely on infrastructure spending.
The burying money in jars was a brilliant piece of theorising. No one disputes that a gold rush inflationary. The burying notes in jars example is basically about creating an artificial gold rush.
“The problem with deficit spending depends on that nature of the spending and the trajectory of the deficit.”
True, but your implicit assumption is that government spending choices can be consistently more good than bad, if they just try hard to make the right kind of choices (like your comment about building infrastructure). Of course any particular spending/investment choice may be good or bad, but what matters is what’s the best method for making many varied decisions over years and decades, which are the kinds of durations needed for differences in efficiency to have an impact.
You can try stocking an ever-expanding roster of government departments with the finest minds you can attract and hope to accumulate enough expertise to make the decisions good ones. Decisions at every scale of human society, mind you, not just where to put Sydney’s second airport.
Or we can harness the power of our entire population, more knowledgeable in aggregate than any number of public bureaucrats. Let us keep more of our resources to use as we see fit, and the superior incentives we have to make the best decisions will mean that despite all the mistakes individuals will make, overall we’re much better off.