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In the past Paul Krugman has expressed sympathy for me, deserted by most of my fellow right-wingers as I try to re-shape Milton Friedman’s ideas for the 21st century. Now I get to sympathize with Krugman, tangling with the extremely frustrating MMTers. Here’s how it goes. The MMTers say X. You show that X is not true. They get outraged, claiming you misrepresented their views. They never said X, they said Y! Then you show that Y isn’t true. Now they are even more outraged, “we never said Y, we said Z.” And so on. I feel a little less stupid about not understanding their views, as even a Nobel-Prize winner is apparently too dense to understand. And yet hundreds of followers, many of whom seem to have little education in economics, have no trouble at all understanding what the MMTers are all about. It makes you wonder.

In any case, here is Paul Krugman:

But what happens next? We’re assuming that there are lending opportunities out there, so the banks won’t leave their newly acquired reserves sitting idle; they’ll convert them into currency, which they lend to individuals. So the government indeed ends up financing itself by printing money, getting the private sector to accept pieces of green paper in return for goods and services. And I think the MMTers agree that this would lead to inflation; I’m not clear on whether they realize that a deficit financed by money issue is more inflationary than a deficit financed by bond issue. For it is. And in my hypothetical example, it would be quite likely that the money-financed deficit would lead to hyperinflation.

In the comment section, Scott Fullwiler:

Fourth, no, a deficit financed by “money” is NOT more inflationary than a deficit financed by bonds. There’s a very simple reason for this–it is operationally impossible to finance a bond issue with “money” unless you have a zero interest rate target, in which case in your own paradigm you are in a liquidity trap.

Here’s how I’d respond to Mr. Fullwiler: Argentina, Turkey, Brazil, Bolivia, Israel, Chile . . . . case after case of countries experiencing extremely high inflation and extremely high nominal interest rates, all because they were monetizing their debts. Not only is it possible, it happens almost every time a country tries to rely on money creation to pay its bills, at least for any extended period of time. Very easy money usually makes interest rates rise.

Here’s Keynes:

“If you are held back [i.e. reluctant to buy bonds], I cannot but suspect that this may be partly due to the thought of so many people in New York being influenced, as it seems to me, by sheer intellectual error. The opinion seems to prevail that inflation is in its essential nature injurious to fixed income securities. If this means an extreme inflation such as is not at all likely is more advantageous to equities than to fixed charges, that is of course true. But people seem to me to overlook the fundamental point that attempts to bring about recovery through monetary or quasi-monetary methods operate solely or almost solely through the rate of interest and they do the trick, if they do it at all, by bringing the rate of interest down.” (J.M. Keynes, Vol. 21, pp. 319-20, March 1, 1934.)

Keynes didn’t believe in a Fisher effect, unless inflation reached hyperinflationary levels. Joan Robinson (an MMTer before her time) was even more extreme. They were both wrong. But modern Keynesians like Krugman have lived through decades in very high trend rates of inflation in lots of fiat money countries. They’ve seen the Fisher Effect in action. They’ve read Cagan’s research on money demand during hyperinflation. That’s why they (and I) are impervious to the MMTers siren song that we can print money to pay the government bills. Perhaps they will have more success attracting a younger economists to their, er . . . group, as the younger generation has experienced little hyperinflation, and several examples of large increases in the monetary base leading to no inflation at all (at near-zero nominal rates.)

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This entry was posted on August 15th, 2011 and is filed under Keynesianism, Modern Monetary Theory, Monetary Theory. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response or Trackback from your own site.



