Forever Fighting Fallacious Fiscal Phantoms: Paul Krugman

by wisdomhunt

Nobel Prize-winning Princeton economics professor and New York Times columnist Paul Krugman is out with a phenomenal article in the Fact (too true to be called “Opinion”) section of Sunday’s NYT.

The short summary: Print money!

The longer summary (all his quotes):

1. …deficit scolds…perpetuate catastrophically high unemployment.

2. the crisis they predicted keeps not happening. Far from fleeing U.S. debt, investors have continued to pile in, driving interest rates to historical lows.

3. But the deficit scolds aren’t giving up…but makes perfect sense if you look at the array of big corporations, from Goldman Sachs to the UnitedHealth Group, that are involved in the effort and would benefit from tax cuts.

4. Supposedly, any day now investors will lose faith in America’s ability to come to grips with its budget failures. When they do, there will be a run on Treasury bonds, interest rates will spike, and the U.S. economy will plunge back into recession….it’s almost impossible to see how this could actually happen to a country in our situation…For we have our own currency…So our government, unlike the Greek government, literally can’t run out of money. After all, it can print the stuff.

5. …it’s true that investors might start to expect higher inflation some years down the road. They might also push down the value of the dollar. Both of these things, however, would actually help rather than hurt the U.S. economy right now: expected inflation would discourage corporations and families from sitting on cash, while a weaker dollar would make our exports more competitive.

Now these arguments are so logically flawless that I hesitate to add any color to them, but I’ll stop hesitating:

1. In the chart below you can see the decline in the US National Debt since 1977. Obviously, if those kook “deficit scolds” hadn’t been so phenomenally successful at capping our national debt at only $16 trillion, we would probably have -8% unemployment (at least!) by now:

2. Investors have definitely been piling into federal debt, thereby keeping interest rates low. Specifically, the investors at the Federal Reserve that monetize the debt, preventing interest rates from increasing as they would in a free market.

3. As if any more firepower was needed, Krugman even gets a jab in at the most hated crony-capital entities there are: Goldman and health care.

I assume his argument is that Goldman wants tight money because they don’t benefit from Federal Reserve fiscal policies. You see, the Federal Reserve keeps Goldman’s borrowing rates at about 0% or so. This allows to essentially mint money by loaning those same dollars out at anything greater than 0%. Nailed that one, Krug.

As for how United Health Group benefits from “deficit scolds”, well just trust Krugman: United Health Group is evil so screw them.

4. Krugman nails this point: the US can (and does!) print infinite amounts of money to pay off their debt so they will never default. Just like the Weimar Republic: you can’t default if you can print!

5. Krugman also nails why inflation will be good:

A. If the value of the dollar goes down, this will help exports. This is great because the US is a net exporter and the few importers that we do have can just find a US supplier! Everybody wins!

B. Savers should be punished for not spending money. Every Keynesian knows frivolous spending drives the economy. If we just force savers and those on fixed income to spend their money today rather than investing it for tomorrow, we’d all be better off.

If only had Krugman had informed us sooner that money printing and deficit spending would solve all our problems.

Better clear some space on the shelf for another Nobel, Krug.