Tuesday, September 13, 2011

Krugman's Fed Road Map: Print Money, Buy Government Bonds!

In reading Paul Krugman, I am struck by the man's chutzpah, his willingness to accuse others of being immoral while simultaneously claiming that his money-printing schemes are moral. Yeah, it's confusing, but to Krugman and his followers, it all makes sense.

Krugman's latest morality play, however, even outdoes himself, and at the same time, he unwittingly presents the "road map" he believes that governments should use when they get into financial trouble. It is hard for me to believe that America's supposed "best" economist is recommending a scheme in which he both calls for governments simply buy their own bonds with their own newly-printed money, and declares that anyone who might oppose such financial trickery as being immoral, but there it is.

Krugman writes:
Here’s how such a run works: Investors, for whatever reason, fear that a country will default on its debt. This makes them unwilling to buy the country’s bonds, or at least not unless offered a very high interest rate. And the fact that the country must roll its debt over at high interest rates worsens its fiscal prospects, making default more likely, so that the crisis of confidence becomes a self-fulfilling prophecy. And as it does, it becomes a banking crisis as well, since a country’s banks are normally heavily invested in government debt.

Now, a country with its own currency, like Britain, can short-circuit this process: if necessary, the Bank of England can step in to buy government debt with newly created money. This might lead to inflation (although even that is doubtful when the economy is depressed), but inflation poses a much smaller threat to investors than outright default.
Before tackling what really is a mind-boggling proposition, let me say that "for whatever reason" is really not economic analysis. Instead, it is Krugman once again demonstrating that he does not understand what Carl Menger called the Law of Cause and Effect.

You see, there is no real reason for this sudden unwillingness for investors to purchase government bonds except for maybe changes in "animal spirits" or maybe just whatever. It is like his "under consumption" theme that under girds his theme in which there is no real cause for this sudden change of mass consumer preferences for buying anything. Blame it on "whatever."

As for the bond-buying scheme, apparently it never occurs to Krugman that once a government resorts to this kind of financial trickery -- and no other term will suffice -- that it is sending the message to investors that its bonds essentially are worthless. I simply cannot see how a contrivance would lead to anything but disaster.

If a government were to do what Krugman recommends, then there would be no constraint at all in its spending, as politicians would claim that it had "free money." Why worry about taxes? Investor confidence? We don't need no stinkin' CONFIDENCE FAIRY! Just print the money and spend!

By the way, this is exactly how Zimbabwe financed its government and it brought ruinous inflation. Yet, Krugman not only recommends this nefarious financing as a "solution," but he also has the gall to claim that anyone who might oppose it is a "moralizer," as though there were something wrong with pointing out that when governments engage in this kind of madness, they also destroy the wealth of every citizen who uses that government's currency.

Since a number of European countries are using the euro, Krugman claims that the European central bank should be printing more euros to buy the debt of countries like Spain and Italy (and I am sure he believes likewise for Greece). Here he is in his own words:
What Mr. (Jean-Claude Trichet) Trichet (the president of the European Central Bank or E.C.B.) and his colleagues should be doing right now is buying up Spanish and Italian debt — that is, doing what these countries would be doing for themselves if they still had their own currencies. In fact, the E.C.B. started doing just that a few weeks ago, and produced a temporary respite for those nations. But the E.C.B. immediately found itself under severe pressure from the moralizers, who hate the idea of letting countries off the hook for their alleged fiscal sins. And the perception that the moralizers will block any further rescue actions has set off a renewed market panic.
Notice that anyone who might point out that this "pull-the-rabbit-out-of-the-hat" finance sows its own seeds for disaster is nothing but a "moralizer" who apparently is bent on inflicting pain on others for no good reason. It doesn't take training in economics for someone to see where such a scheme would lead -- and I have no doubt that government employee unions would demand such a "fix" in order to prop up their own bloated trickery -- but from what I have read of Krugman, he seems to think that these unions really are creating wealth.

At least we see Krugman's road map for the USA: Have the Fed directly purchase short-term U.S. bonds. For now, such a scheme would be illegal, given that the Federal Reserve Act of 1913 expressly forbids exactly what Krugman has proposed for other countries to do. (No doubt, the people who wrote the original act were "moralizers," too.)

As I said before, it does not take training in economics to see where such actions would lead. However, if one has "economics" training from a lofty U.S. university, then one apparently is free to discard all laws of economics -- and all rules of common sense.


Lord Keynes said...

Something about how I believe you are wrong.

Something about how I believe you did not read Krugman correctly.

Something about how you ignore Post Keynesian doctrines of idle resources, and unemployment.

Some insults, some diversions, and some flourishes.

Lord Keynes said...

To the person above impersonating me: get a life.

"As for the bond-buying scheme, apparently it never occurs to Krugman that once a government resorts to this kind of financial trickery -- and no other term will suffice -- that it is sending the message to investors that its bonds essentially are worthless. "

The US bought its own bonds during the Second World War - investors didn't conclude that US bonds were "essentially worthless."

Other countries - like Australia - had for decades "tap systems" for issuing public debt whereby the central bank often bought bonds directly from the Treasury. It worked fine.

burkll13 said...

you forgot:

meaningless citation

ridiculously flawed citation

Citation from an "Austrian" attempting to subvert the theory, but showing his complete lack of critical thinking

Mike M said...

Professor Anderson
1. May I suggest you change the name of your blog to Progressives in Wonderland” or something else. To continue to use this man’s name extends credibility he doesn’t deserve.
2. You stated direct purchase of bonds is illegal. Technically you are correct. However given the Fed will purchase them indirectly via the primary dealers makes the point irrelevant.
3. Krugman isn’t even smart enough to advocate changing the system entirely whereby the Treasury monetizes directly (requires currency change) so we can skip the interest obligation. Or is he bought and paid for by the bankers as well?

Lord Keynes said...

To the person above impersonating Lord Keynes, who has a problem with impersonations, should know that impersonating Lord Keynes whilst complaining of impersonations is hypocritical.

Something about not understanding that investors can still buy essentially worthless debt if they can sell them to the local banking system, who themselves buy essentially worthless debt if they too know that they can sell them to the central bank.

Something about not understanding that as long as the essentially worthless debt is initially bought and sold to only a portion of the total population, the front runners can make out with additional real income on account of general prices having not yet increased due to the monetization.

Something more hand waving, some more insults, some more feelings of being offended that your masters are being ridiculed.

Dennis said...

Monetizing debt via central bank purchases is just a fancy and roundabout way of defaulting on it. Governments are defrauding creditors by paying them back in currency whose purchasing power has declined from what it was when the money was initially loaned.

Inflation, no matter how small or how large, is an act of fraud. It's the equivalent of selling the same house to two different people at the same time. When the deal is done, each buyer only has half a house when they thought they were getting the whole thing. By the time this whole fiscal mess is over, no one in his right mind will lend a penny to any government anywhere, unless it is at exorbitant interest rates.

ayassos said...

This is extremely good work today, Prof. Anderson. You have summed up the Krugman approach entirely. Krugman refuses to acknowledge that his Keynesian prescriptions have run the U.S. fiscal system into the ground, and that the U.S. debt-fueled prosperity of the last 30 years cannot be revived by adding a greater load of debt to that which is already unsustainable. Krugman thinks that the trend line leading up to 2007 can simply be regained by govt. deficit spending, and that the delta between where we are now and where we should be on that phantom trend line represents our lost "productivity;" thus, if people would simply listent to Krugman, that whole problem would be "easily solved." He says such things on a regular basis. He and his acolytes, Brad DeLong and Mark Thoma, peddle such madness on virtually a daily basis. I suppose, ultimately, it is all about their academic position - this is how they made their bones in their unreal world, and they're going to stick to it, even if, as you point out, it makes no sense whatsoever.

As for the Fed simply buying up the "auctions:" yeah, this is what the guy's ideas lead to. Thus, abolish all taxes, cut out the primary dealer middlemen, and let's get this prosperity party started. If actual bond buyers won't participate, for "whatever reason," such as the insolvency of the United States, let's just do it this other way.

William L. Anderson said...

True, LK, the U.S. Government did that during WWII, something that came to my mind while I was writing the post. However, at that time, bonds were the only game in town and there was a lot of pressure on banks and other institutions to purchase U.S. bonds, so that hardly is a good example.

Do you really think that today's politicians would show the kind of restraint that U.S. politicians showed after WWII? THAT is the question here, and I doubt you can say "yes."

Dennis said...

The negative effects of the Fed's monetization of debt during WWII was masked by the wage and price controls that were slapped on virtually every sector of the economy. Prices would not rise in response to such measures because they were legally prohibited from doing so. The costs of this policy were borne by the average citizen who had to put up with years of shortages and the outright non-existence of many consumer items.

Bob Roddis said...

Lord Keynes is hip with the wage and price controls:

The Post Keynesian remedy for inflation has always been some form of incomes policy combined with commodity price stabilisation.


Read his amazing misunderstanding of everything economic here:


No one need say more.

Lord Keynes said...

True, LK, the U.S. Government did that during WWII, something that came to my mind while I was writing the post. However, at that time, bonds were the only game in town and there was a lot of pressure on banks and other institutions to purchase U.S. bonds, so that hardly is a good example.

Your original argument is that if
government resorts to monetising a deficit "it is sending the message to investors that its bonds essentially are worthless."

Yet US bonds did not collapse after the war when investors were free to dump them after seeing the huge monetised deficits.

Furthermore, as I said, Australia and other countries had "tap systems" where central banks had the power to buy bonds directly from the treasury if those issues were not bought by the private sector. Australia's bonds never became "worthless":


"Do you really think that today's politicians would show the kind of restraint that U.S. politicians showed after WWII?

What "restraint" was that? US politicians increased federal spending from 10% of GDP in 1948 to 20% by 1954. It has fluctuated from about 16% to 23% ever since.


Anonymous said...

I thought QE was accomplished by direct purchases of government bonds and t bill by the fed.
Where did I go wrong?

Bob Roddis said...

LK believes in "cost push inflation" and "demand pull inflation".


No need to say more.

William L. Anderson said...

QE or "Quantitative Easing" involved the purchase of long-term debt. The vast amount of U.S. Government debt is in the form of short-term bonds, usually six-months.

What often happens is that the debt is rolled over and the government just pays the interest. However, the government also borrows a lot of money in order to pay back some of its debt, a real-live Borrowing from Peter to Pay Paul.

Anonymous said...

Thanks for replying, I was thinking of
Ron Paul when he mentioned 1.7 trillion in debt directly purchased by the fed, which he thought should be written off by the fed, rather than raise the debt ceiling.
My understanding of money creation comes from Rothbards "Mystery of Banking" where he spells out how much more inflationary it is for the fed to directly purchase t-bonds than indirectly through the investment banks.
Of course the money supply has grown explosively, however this has not triggered the runaway inflation predicted by some... due to the enormous demand for cash holdings.
I found my understanding of this greatly improved by recent read of Mises "Theory of Money and Credit".

Bob Roddis said...

Speaking of MMT, AP "Hut Tax" Lerner admits that the debt won't be paid:


LK and AP Lerner implode the same week.

Dennis said...

If the market were left on its own to clear out the malinvestments from the housing bubble and the government debt bubble, the economy should now be experiencing a substantial decline in the general price level. The fact that prices are still climbing upwards overall indicates a substantial inflation, thanks to central bank pump priming. Inflation need not be seen just as an increase in prices at some rate above zero. If, for example, under a free market prices should be falling at a negative 20% rate, and inflation is instead running at a positive rate of 10%, the true inflation rate is 30%, not 10%.

While a plunge in asset prices would make many loans unpayable, that is exactly what should happen if the economy is to recover from a bubble. Plunging asset prices are the means by which malinvestments are revealed, which can then be liquidated at a price which will allow new investors to create real wealth with those assets. Absent this cleansing process, investors cannot tell where real value lies.

Bob Roddis said...

Dennis, you said it.

When the statists show up to whine about our alleged cruelty, it was their funny money schemes in the first place that misled the victims into making unsound long-term investments in housing and other lines.

jason h said...

I sure am glad the gov't will spend capital in uncertain economic times. There couldn't possibly be a logical reason the private sector is holding onto cash.

Whoops gov't backed Solyndra just went bankrupt, there goes $535 million. What was it Austrians said about gov't having no incentive to pick sound investments?

Mike Cheel said...


Don't forget the reconstruction money:


jason h said...

Ah, but you see that just gets rolled up into war spending - no biggie.

Besides the war is so thousand and eight. The green economy is way of the future...which means the way of the future is apparently...

wait for it...


William L. Anderson said...

I need to ask that whoever is writing under LK that is NOT LK to stop doing that. Whether or not we can agree with LK is beside the point; impersonating someone else is not a good thing.

As you know, I have made this comment section a free-for-all in terms of what is said, and LK and others are free to disagree with my posts, call me "dishonest," and anything else. My view is that if I am going to put my viewpoints out in a very public place, then I should be able to handle what comes my way. That's life. It has nothing to do with agreeing or disagreeing with someone's post.

But, there are some things that I do consider to be out-of-bounds, and impersonating someone else is one of them. Please respect my wishes on this.

Bob Roddis said...

From the horse’s mouth of the MMTers. The debt either will not be satisfied with real stuff or it really does not exist:



alaskaman said...

Now if only Anderson would stop impersonating an economist...

Anonymous said...

And if alaskaman would just contribute something instead of always trolling...

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