For whatever reason

Paul Krugman has another piece up on MMT. I like this piece a lot more than the last one he wrote. I suggest you read it.

Here’s the one passage I do find troubling, however:

Let’s have a more or less concrete example. Suppose that at some future date — a date at which private demand for funds has revived, so that there are lending opportunities — the US government has committed itself to spending equal to 27 percent of GDP, while the tax laws only lead to 17 percent of GDP in revenues. And consider what happens in that case under two scenarios. In the first, investors believe that the government will eventually raise revenue and/or cut spending, and are willing to lend enough to cover the deficit. In the second, for whatever reason, investors refuse to buy US bonds.

It’s actually just three words that bother me: “for whatever reason”. i think the whole discussion hangs on those three words actually. Interest rates largely reflect the expected path of future policy rates. It does not follow logically for me that investors would refuse to buy US bonds ‘for whatever reason’. Sure, currency revulsion can cause the exchange rate to collapse and inflation to go through the roof. As Dr. Krugman points out, you could even get hyperinflation under certain circumstances.

But as I pointed out earlier today:

In the end, this is about interest rates. Why is Paul Krugman worrying about the US losing access to the bond market when the term structure of the yield curve largely reflects expected future policy rates? We just saw this is true after the Fed moved to permanent zero at the last FOMC meeting. “The 0.375% US Treasury note maturing on 31 July 2013 is now yielding only 19 basis points.” The Fed can do as much ‘financial repression’ as they want by keeping rates below the headline inflation rate since it has monopoly power in the market for base money. Inflation and currency depreciation are the issues – not a steeper yield curve.

Remember, we have just witnessed investors willing to flee to the liquidity of Treasuries even as the government threatened to default on those securities. That doesn’t speak to investors refusing to buy US bonds in the least. I suppose they could do at some undetermined point in the future. However, saying ‘for whatever reason’ presupposes the outcome. I need to see the steps that get us from 2.25% 10-year rates to 4 or 5% without the Fed set to actively raise them because the only way rates are going higher is because the Fed is forced by inflation to raise them.

Source: MMT, Again, Paul Krugman

  1. john haskell says

    The “whatever reason” is just hypothesized so he can illustrate the difference between his position and the MMT-ers.

    If “for whatever reason” the markets didn’t want to buy Federal debt, and the Federal government just issued currency, inflation would follow very close behind. You can’t use bonds to bid up the price of goods and services.

  2. gaius marius says

    the piece irritates me. it’s clear he’s only considered MMT in the most half-baked way. i’m sure he’s a busy man, but what can you really claim to understand about MMT if you think banks are reserve-constrained, as he apparently does? he’s obviously understood very little of whatever he’s read, if he’s actually read much. that’s a shame, as there’s no doubt he’s a brilliant thinker and could i’m sure come up with a respectable critique if he bothered to actually learn about it.

    what’s more, he obviously thinks MMTers are daft. if a critique as simpleminded as this were valid, would MMT have any intelligent advocates at all? the answer is no, and so by implication he reveals his opinion.

    i understand that even a brilliant mainstream economist will find it difficult to shed the maxims and conventions of mainstream practice to consider the alternatives even when the mainstream has been shown to be a laughably poor predictor of reality. but this is disappointing nevertheless.

  3. wh10 says

    I might not be getting the accounting correct, but I’ll give it a go.

    When bank PDs purchase treasuries at auction (as opposed to non bank PDs), then the banking system holds the bond and the non-bank sector gets a net new deposit; note, the banks don’t use reserves to purchase the bond, they essentially create a loan and receive the bond in return. This is in contrast to when a non-bank PD purchases a treasury, in which case net deposits stay the same but the non-bank sector holds a net new tresury. In both cases net financial assets goes up by the same amount.

    Does Krugman think the portion of treasury auctions in which bank PDs obtain treasuries is more inflationary than the portion of the auction purchased by non-bank PDs?

    Bank PDs have unlimited ability to lend the US govt credit in exchange for a treasury securities. No reserves or any type of money are used in this process. From the perspective, even in the absence of Fed overdrafts, a bond auction can’t ever fail, unless no one wants to be a PD…

  4. Nathan Aschbacher says

    I don’t understand the basis of this argument at all. If you’re pursuing MMT structures and you still have the bond market, then you’re doing it wrong.

    The bond market is nothing but largesse to investors in sovereign debt for no reason but for the sake of providing them largesse. This has been the case since 1971.

    The bond market is an anachronism that’s based on gold-standard monetary mechanisms. One should have to establish why the bond market is even necessary or beneficial when operating an MMT framework. Is there some intrinsic value in providing all that largesse specifically via a yield curve?

  5. Max says

    John, central banks control the “price of money” (interest rate), not the supply. Money is always available on demand.

    The *base* money supply is totally irrelevant to inflation, and this is true regardless of whether the economy is in a “liquidity trap”.

  6. Philip Pilkington says

    Krugman’s article was disingenuous.

    First he assumes that MMTers are all crazy dogmatists ala John Galt. This then allows him to make a crazy argument in which a government is running a substantial deficit amidst strong private sector demand. Would an MMTers advocate this? I can’t see why.

    He then reinforces this by arguing that we would begin issuing reserves instead of bonds as the yields went up (presumably in response to inflationary expectations — which, in such a circumstance, would be wholly justifiable). This would push interest rates down to 0.25% and lead to even more inflation.

    Why would MMTers advocate this? Because in Krugman’s rather silly mind MMTers are John Galt doctrinaire types. Not to be taken seriously. Krugman has a portrait in his mind of MMTers as quasi-religious loons who would pursue bizarre and destructive policies if they were given the chance. The problem with this portrait? Well, Krugman drew it himself, of course.

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