Last summer I wrote a post clarifying some points that I have learned about Modern Monetary Theory. The genesis of the post was a gross mischaracterization of Modern Money Theory (MMT) by Paul Krugman in a piece called “I Would Do Anything For Stimulus, But I Won’t Do That (Wonkish)”, which Paul Krugman had written in July of last year.
Last week Paul Krugman again attempted to take on MMT in another piece called "Franc Thoughts on Long Run Issues." in that post, Krugman makes the same bogus claims about MMT’s saying deficits don’t matter in a fiat currency regime.
Even non-MMT fiat currency sceptics like me have figured it out. Personally, I see something cynical about these repeated bogus claims.
For example, in March, Dr. Krugman wrote:
As I understand the MMT position, it is that the only thing we need to consider is whether the deficit creates excess demand to such an extent to be inflationary.
Clearly he understands the MMT position. Yet last week he wrote:
MMT (modern monetary theory) types… insist that deficits are never a problem as long as you have your own currency.
See the difference?
Statement #1 is correct. Statement #2 is incorrect – and a repeat of what he said last summer. Since Krugman made statement #1 prior to statement #2, I am left guessing why he has returned to the mischaracterization which is the subject of this post.
P.S. – 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.
P.P.S – The real issues are currency sovereignty, fiscal space and malinvestment. What we should really be worried about is stopping people worried about the US becoming the next Greece turning the US into the next Japan.
Here’s the original post: Misunderstanding Modern Monetary Theory.