CNBC’s John Carney on Krugman and MMT

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Yes!

Paul Krugman Goes MMT on Italy

By John Carney

November 11 (CNBC) — It seems pretty clear that the school of thought known as Modern Monetary Theory has made a big impact on Paul Krugman’s thinking.

As Cullen Roche at Pragmatic Capitalism points out, just a few months ago the spread between bonds issued by Japan and Italy, which have similar debt and demographic issues, was perplexing Krugman.

“A question (to which I don’t have the full answer): why are the interest rates on Italian and Japanese debt so different? As of right now, 10-year Japanese bonds are yielding 1.09%; 10-year Italian bonds 5.76%.

…I actually don’t have a firm view. But it seems to be an important puzzle to resolve.”

But today’s column is basically right out of MMT.

“What has happened, it turns out, is that by going on the euro, Spain and Italy in effect reduced themselves to the status of Third World countries that have to borrow in someone else’s currency, with all the loss of flexibility that implies. In particular, since euro-area countries can’t print money even in an emergency, they’re subject to funding disruptions in a way that nations that kept their own currencies aren’t — and the result is what you see right now. America, which borrows in dollars, doesn’t have that problem.”

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28 Responses to CNBC’s John Carney on Krugman and MMT

  1. MamMoTh says:

    In a debate going on tonight in Canada between David Rosenberg, Paul Krugman, Larry Summers, and Ian Bremmer, the attendees were asked what they would do for the Canadian economy.
    Krugman’s simple answer: “Hold onto your own currency.”

    Read more: http://www.businessinsider.com/paul-krugman-the-worlds-two-most-impressive-economies-have-one-thing-in-common-2011-11

    Reply

  2. When Krugman makes a few of the following statements (contained in http://rodgermmitchell.wordpress.com/2011/11/11/the-selling-of-science-in-america-how-to-make-economic-facts-penetrate-closed-minds/), then maybe . . . maybe he may “get it.” (And when he does, he’ll say he knew it all the time):

    1. The federal government creates dollars by paying its bills
    2. Without federal deficits there would be no dollars; surpluses reduce the money supply
    3. Taxes destroy dollars
    4. Neither taxes nor borrowing help the federal government pay for its spending.
    5. Today’s and future taxpayers will not pay for today’s federal spending.
    6. A Monetarily Sovereign nation can pay any bill of any size at any time, and cannot be forced into bankruptcy.
    7. No agency of a Monetarily Sovereign can be forced into bankruptcy without the consent of the government
    8. Bank lending creates bank reserves that form the basis for further bank lending.
    9. The federal debt is the total of outstanding T-securities and not functionally the total of federal deficits.
    10. State, county and city governments finances are unlike federal finances.
    11. Greece’s and Italy’s finances are unlike U.S. finances in that they can be forced into bankruptcy.
    12. The debt/GDP ratio does not measure the federal government’s ability to service its debts.

    Reply

    Jose Reply:

    @Rodger Malcolm Mitchell,

    On point 2, it’s interesting to note that post Keynesians such as Marc Lavoie state that

    “…even if a government keeps running balanced budgets, central bank money can be provided whenever the central bank makes advances to the private sector.”

    Lavoie adds that MMTers like L. Randall Wray also recognize that “a surplus on the Treasury’s account is possible as long as the central bank injects reserves through purchases of assets or through loans of reserves”.

    Reply

    WARREN MOSLER Reply:

    which is why the cb need lend on a secured basis etc.

    my full statement is that the price level is a function of prices paid by govt when it spends and/or collateral demanded when it lends

    Reply

    John O'Connell Reply:

    @Jose,

    The Central Bank could do that, I would say (being a novice MMTer) only if they purchased enough treasury securities to offset any trade deficit and domestic non-government savings; beyond that their purchases could act just like a budget deficit.

    However, the supply of Treasury securities is limited, and when they are all owned by the Fed, what do you do next?

    Federal Deficits – Net Imports = Net Private Savings

    But, wait, I’ve confused myself. When Treasury spends, money is created. When the Fed buys “assets”, it merely exchanges one private sector FINANCIAL asset for another, it does not create money. Right? It’s not the same as the DOT buying concrete.

    Do Treasury Securities in the hands of the public count the same as cash or bank balances? If so, then the Fed can’t do anything to offset a budget surplus.

    If the Fed buys Treasuries that were held by foreigners, then the foreigners have dollars that are only useful to buy US goods and services. So maybe that purchase would reduce the trade deficit, and thereby increase aggregate demand in the same way as a tax cut would do. But what if the foreigners bought a US corporate bond instead of some US-made product? I’m so confused.

    Reply

    Matt Franko Reply:

    @John O’Connell, John, “If the Fed buys Treasuries that were held by foreigners, then the foreigners have dollars that are only useful to buy US goods and services.”

    They are still useful to satisfy external savings desires. Same rules apply that Warren points out whether the balances are in the “savings account” or “checking account”. Resp,

    MamMoTh Reply:

    @John O’Connell, you can buy pretty much anything everywhere with US dollars.

    John O'Connell Reply:

    @John O’Connell,

    @Matt Franko,

    But, if they desire to save, then they buy US Treasuries, right? They don’t hold dollars in their mattresses, do they? Or in non-interest-bearing demand accounts, in excess of their transaction needs. They (as a group) would only sell their treasuries back to the Fed if they no longer desired to save, which means they desire to spend instead. And see below:

    @Mammoth,

    Yes, you can, but eventually those dollars end up in the hands of someone who wants to save them, or who wants to buy US goods. And nobody can save them, because the Fed bought their Treasuries. The amount of $US that is used in non-US domestic and international transactions must be fairly stable, no? Germans are not suddenly going to start using dollars instead of Euro at their grocery stores.

    Matt Franko Reply:

    @John O’Connell, John, Check out line item 29 at this report, for Q1 2011, I believe this represents a $354B increase in foreign bank deposits for the quarter so it’s not in the mattress it looks like they had to leave the money in the US banks on deposit as the Fed was net buying all of the new issuance of USTs under the QE2 at that time….

    http://federalreserve.gov/econresdata/releases/intlsumm/current.htm

    So it’s like Warren says, “all we owe them is a bank statement…” Resp,

    MamMoTh Reply:

    @John O’Connell,

    US Dollars are used to buy goods and services domestically pretty everywhere, especially in the non-developed world.

    Rodger Malcolm Mitchell Reply:

    @Jose, Where does the Central Bank get dollars if not from deficits?

    Reply

    Jose Reply:

    @Rodger Malcolm Mitchell,

    The Fed can create dollars out of thin air by buying assets from the private sector.

    If I sell a T bond to the Fed I’ll get a deposit at my bank – meaning M has increased by the amount of the deposit.

    Of course, once the private sector has sold all its assets to the Fed then budget deficits will be the only way to increase M.

    This is how I interpret Lavoie’s point.

  3. Adam (ak) says:

    In my opinion Paul Krugman (still) operates within the Neo-Keynesian paradigm:

    http://krugman.blogs.nytimes.com/2011/11/11/liquidity-traps-and-hawaiian-shirts/

    He sticks to the mainstream explanation of the weakness of the monetary policy (the expansion of monetary base) near zero interest rate called a “liquidity trap”.

    It is not his fault, he still believes in certain models and this particular one gives an almost correct result when the economy is in a debt deleveraging phase – but the explanation and the prescription how to get out of the trap can be questioned.

    “It turns out that a liquidity trap can indeed happen; but that it is in a fundamental sense an expectational issue. Monetary expansion is irrelevant because the private sector does not expect it to be sustained, because they believe that given a chance the central bank will revert to type and stabilize prices.”

    What if the “trap” occurs because the private sector is attempting to repay its aggregate debt to itself in the banking system and the only cure in the absence of export surpluses is government deficit spending?

    Reply

    wh10 Reply:

    @Adam (ak),

    Yes, but like all good neo-keynesians, they like to make ad hoc adjustments to their models. Krugman is bolting-on a rule about currency sovereignty. He doesn’t yet understand the banking system.

    Reply

    Mario Reply:

    @Adam (ak),

    yes but he’s definitely our greatest hope and holds the greatest potential to yield the most rewards and progress. The work it could take to get Krugman on board will pay itself back if/when he gets it. He’s a worthy investment to be sure. Like it or not…until more people pick up the torch…

    Reply

    PZ Reply:

    @Adam (ak),

    They all (mainstream economist) seem to be obsessed with money. Money supply, money velocity, M1, M2, M17…
    they measure these carefully and ponder their meaning.

    What they miss is that demand-pull inflation is not about the money it’s about wealth. So it is useless exercise to swap govt. bonds for money, increased money in existence won’t change anybodys wealth position one bit!

    Reply

  4. “why are the interest rates on Italian and Japanese debt so different?” Partly because the Japanese are obsessive compulsive savers.

    Reply

    Neil Wilson Reply:

    @Ralph Musgrave,

    So are the Italians if the “Italy isn’t a problem because it funds most of its own debt” lines are to be believed.

    Reply

  5. zanon says:

    Please stop all deluding yourselves

    when krugman says US should cut taxes and run higher deficit, then we know he understand MMT

    Reply

    Mario Reply:

    @zanon,

    it can be a next logical step after realizing how the bond market operates for currency issuers versus currency users. If only he’ll connect the dots…or just read Warren’s works (or any of the others out there).

    But he’s one step closer…and in regards to MMT that is definitely worth something.

    Reply

    Anders Reply:

    @zanon, you’re oversimplfying.

    PK says “fiscal stimulus now, but we need a route map to reduce the deficit in in due course because it could be a problem”. The “stimulus now” bit agrees with MMT, but stating that the deficit will be a problem in future is non-MMT – and provides support for the austerity crowd.

    Reply

    WARREN MOSLER Reply:

    To me the interesting part is the author named MMT

    Reply

    zanon Reply:

    @zanon, WARREN: Yes — that the headline includes “MMT” is the real story.

    But Krugman is not MMT in any way, and all this nonsense about “if he just go one step further” is delusion.

    Anders/Mario: One is either in paradigm or outside. It is like saying that, as woman get fat, she is becoming closer to being pregnant. Or that her fatness now mean pregnance later.

    The only member of recent administration who got MMT “right” was dear old dick cheney when he say “deficit don’t matter”. When krugman has column called “cheney was right” then we will know he is in paradigm, and also, hell has become frozen.

    Reply

  6. hamish says:

    I don’t think MMT says 3rd world countries HAVE to borrow in foreign currencies, so he’s giving special status to currencies like the USD, but there is an acknowledgement that a currency issuer is different to a user, which is fundamental to MMT.

    Reply

  7. Kristjan says:

    Paul Krugman is the best thing that happened to “MMT sales department”.
    Qeite a few have heard about James Galbraith, fewer about Warren Mosler(sports car fans have usually), fewer yet about Randall Wray and Bill Mitchell. Paul Krugman is a household name. And let’s face It, he hasn’t been nasty toward MMT.
    He has been treated as he knows It all, and he should know It better than others because he has a Nobel prize. Just another case of being a treasury secretary doesn’t make you smarter, getting a Nobel doesn’t make you super economist.
    I like Paul, he is better than most of them.

    Reply

  8. Dan Lynch says:

    Paul has not fully embraced MMT, but he seems to be moving in that direction — at a glacial pace.

    Of course, you have seen the pic of Paul holding Warren’s book ?
    http://money4nothingchicks4free.wordpress.com/2011/08/11/heavyweight-keynesian-paul-krugman-is-talking-about-mmt-again-the-battle-continous/

    Reply

  9. Max says:

    Krugman may have more of a clue about bonds now, but he’s hardly doing MMT. There’s nothing in the article that Milton Friedman would disagree with.

    Reply

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