Last March on my other blog (just before the Tonya Craft case basically took over its subject matter), I had a post on recent statements by James K. Galbraith. Professor Galbraith took umbrage and made a post, which I was glad to see him do.
His point was this: We don't have to worry about the government going bankrupt as long as it has legal control over what is called "money." Thus, government always will pay its bills because it can print the currency by which the bondholders receive payment. Thus, the size of deficits does not matter because government cannot (by definition) go bankrupt.
Obviously, if one stops to think about what Galbraith claims, it is almost mind-boggling. However, keep in mind that, like his late father, he is partial to socialism and even the more virulent forms of communism, in which governments used murder and imprisonment to try to force people into behavior that they otherwise would not want to follow. In other words, like John Kenneth Galbraith, James Galbraith believes that governments can do what they want as long as (1) they have a printing press and monopoly over money, and (2) they employ whatever coercive methods they wish.
Now, in his criticism of Galbraith today, Paul Krugman does not go as far as I do, but I do find myself in agreement with much of what he writes. First, Krugman outlines Galbraith's position fairly and accurately, so if you wish to get a good interpretation, read Krugman's post.
Second, he creates a mathematical model that reminds me of some of the things I saw in grad school (and is easy to follow) in which he sets up a scenario in which the government runs up against its limits of borrowing (what can be borrowed by others who have a "surplus" to lend). What he concludes is that at some point, the rate of inflation takes off into the empty space of hyperinflation.
How might that play out in our system? At some point, the Federal Reserve becomes the primary purchaser of U.S. debt (as opposed to its current role of purchasing debt in the secondary market), so government is directly spending newly-printed dollars which quickly move through the economy (as velocity increases). In fact, I think that if there is a weakness in this model (and any model which simply acts on the pure quantity of money theory has fundamental weaknesses in explaining economic behavior on behalf of individuals), it is the assumption that velocity (V) remains constant throughout.
One of the characteristics of a hyperinflation is the quickening of velocity -- how quickly money changes hands in an economy. The other thing -- and Krugman accurately mentions this -- is that people will get out of money altogether and use substitutes that either hold or increase in value (relative to money).
My sense is that Galbraith believes that government simply can "crack down" and force people to accept money (On pain of death, if need be?). Krugman does not go that far, but he is a True Believer in coercion, at least "progressive" style.
Nonetheless, Krugman's point here is well-taken, and I would agree that there is the danger of hyperinflation, given the government's path. Galbraith argues that government can exercise its powers to the point where people are forced to use the government's money, while Krugman simply says that we are not near any point of hyperinflation, given that the current Consumer Price Index is pointed downward.
There is much more I would like to say here, but I wanted to point out that when I believe Krugman is at least partially right, I will give him credit.