JAMES GALBRAITH RESPONDS TO PAUL KRUGMAN
There are many excellent comments on the recent Paul Krugman vs. MMT story (see an excellent summary of the comments here), but I wanted to highlight the comment by James Galbraith, which really cuts to the chase:
What do you mean, exactly, by the phrase, “solvency of the government”?
According to my dictionary (Webster’s Third New International) an entity is “solvent” when it is “able… to pay all legal debts.”
If you will look in your wallet, you will find, on any Federal Reserve Note: “This Note is Legal Tender for All Debts Public and Private.”
Can we agree that the United States government, of which the Federal Reserve is a part, can always produce the Federal Reserve Notes required to pay its public debts?
It follows, without any possibility of misunderstanding or error, that the United States Government is always going to be solvent.
According to the same source, an entity is “insolvent” when it is unable to pay debts, or has “liabilities in excess of a reasonable market value of assets held.”
If this is what you have in mind, then please explain: what is the “reasonable market value of assets held” by the government of the United States? Go ahead, if you want, and add up all the land, buildings, aircraft carriers and submarines. And then, don’t forget to add the capacity to produce, without limit, pieces of paper of a legal – and therefore market – value of “one dollar” each.
Can this value, which is unlimited, ever be less than the finite value of public debts? No, it cannot.
Conclusion: A government that issues its own currency and owes its debt in that currency cannot be insolvent.
Now, let’s go to your hypothetical future case: full employment and a six percent of GDP deficit. Could this be inflationary? Sure. Could it cause a fall in the nominal exchange rate? Sure. Could the Fed offset this with higher interest rates, raising the rates paid on federal debt? Sure. And would the bonds sell? Of course they would. In an inflation, people don’t hold on to cash.
What can you mean, Paul, by your scenario in which “the US government [cannot] sell bonds on international markets”? All bond markets are international. Does it matter whether the buyers are “foreign” or “domestic”? Of course it doesn’t. It’s just as foolish to worry that foreigners might not buy our bonds, as it is to worry that they own too many of them now.
Can we agree, please, that this disposes of the non-issue of “solvency”? I hope so.
We’re getting over-run by waves of long-run deficit-hysteria and it does not help to complicate the question with this false issue.
Please turn your firepower to the very foolish statement just now by ten former CEA chairs, http://tinyurl.com/4ky3qpd not-including the admirable Joe Stiglitz. The ex-chairs claim, among other things, that the Bowles-Simpson report “documents that ‘the problem is real, and the solution will be painful.’” In fact, the B-S draft documents nothing at all; it has just one page of assertions and the rest is a laundry list.
Go get ‘em, please.
JG
Dead right Professor Galbraith.
Krugman’s core point is a logical fallacy hence junking the entire statement.
An economy experiencing demand-pull inflation due to full employment, then somehow loses access to the bond market? Errrr, how? For inflation to be running so hot that bidders shun bonds and dump what they have, that inflation would have to be highly volatile (high inflation is irrelevant to auctions if it’s stable and high).
Even if that somehow happened and the Fed becomes the only buyer of Treasury paper, it’s irrelevant because yields don’t matter in this situation firstly because the Fedury is one entity and can’t have debt to itself, secondly, because the Fed remits interest paid by the Treasury. This just makes the point that bond auctions serve many purposes, one of which is NOT funding the US government’s spending (that aspect of auctions is just a political smokescreen).
The most obvious way to get a “breakdown” scenario leading to a flight of foreign capital, would be for the US to experience a period of extreme political instability. Something like overthrowing the government, installing a dictatorship and letting Mugabe come to run the place…
If Krugman is suggestion that this is possible, then how on earth does he meld a banana republic (which has experienced flight of foreign capital) with an economy experiencing demand-pull inflation due to full employment?
If, at the simplest, he’s suggesting that demand-pull inflation can rise high enough to necessitate an erosion of confidence in the stability of the economy, leading to great strife, then I beg to differ!
I’d like to hear him explain why he things MMT proponents would blindly march an economy into trouble by pumping excessive deficit spending. As I understand MMTers, deficit spending is a defensive measure only, the primary aim is to support the continued development of the private sector, which means pulling in deficit spending when the private sector is robust. In Krugman’s future healthy economy, why does he think MMTers would support a large deficit?
*typo warnings
Great comment. Paul can’t argue with any of it.
“Go ahead, if you want, and add up all the land, buildings, aircraft carriers and submarines. And then, don’t forget to add the capacity to produce, without limit, pieces of paper of a legal – and therefore market – value of “one dollar” each….Can this value, which is unlimited, ever be less than the finite value of public debts? No, it cannot.”
Is he talking about the present value of the future productions of U.S. assets, or the value of being about to denominate your debts in your own currency?
I would think that one could definitely give out more claims checks to future production to foreign holders than can be produced in the future with currency (and future assets) or productive capability.
I would argue that the said value of productive assets are, under no circumstances, infinite.
I would think that the value of a monopoly of currency cannot be either.
I think he is unnecessarily overstating his case. Yes, the U.S. cannot become “insolvent.” Point made, but no value is infinite.
Of course, USA are solvent. Or course, the value of the currency ($$ FX rate here) is the relation between the total value hold (reserves, properties, production capacity) divided by the total NET amount of money issued (debt issued by Treasury less debt hold by US citizens). If the second increase (thanks to MMT), the value of $$ (for foreigners or for US citizens to buy foreign assets) will decrease.
But this will not solve any problem. I really think the discussion between MMT, spending, Gold standard, austerity is misplaced. The ONLY important thing in all monetary mechanism is the target of the margins created. Whatever these margins are obtained by money printing (monetizing deficit) or austerity (reduce spendings), you must ask what to do with. If they are used to build future production capacity (our futur richness) by investing in research, education, technology, process, infrastructure, these policies can lead to a bright future, whatever thee margins come from. Look at Germany which made reforms under austerity during the last decade, and who is now the best worldwide exporter of technology goods. But if MMT is targeted to restore “too big to fail banks” balance-sheets, it will fail in any case.
Derfem, you bring up a good point. Let us add to that the issue of debt & deficits.
I read a short paper recently, extracts from Abba Lerner’s “funtional finance” (spelling??).
It is isn’t that you are running a deficit that matters. What matters is WHY you are doing so. IOW, deficits/surpluses are simply a result of waht your economic plans are not the other way around.
I found that somewhat interesting.
I was unnecessarily overstating the case. On purpose.
JG
Thanks for clarifying professor. Excellent comments.
Best,
Cullen
Why?
Some have pointed out that Krugman could be exaggerating as well, but the whole MMT community jumped on his case.
It seems that all this exaggeration is being used primarily for advertising purposes…
Thanks for taking time to respond btw
Again, this debate on deficits is a red herring (although, PK and other “experts” maybe perpetuating it by lending their authority). What deficit hawks (and probably PK) is really saying is: “as a government we don’t know how to be good stewards of the USD, and we really have no good ideas, so the safest thing to protect us from ourselves is to stop building roads to nowhere.”
If you have ever worked in sales, you may know that your first priority is to understand what the customers’ real objections are when they are reluctant to buy a product, because usually they will no tell you, but rather give a tangentially-related excuse. This is one of those cases. Lack of imagination is what this is really about.
It helps pushing an agenda. Most of the spending cuts are ideologically motivated. It’s easier to cut certain things if you can just say “we can’t afford it” instead of “we don’t want people to have it”.
You are right, but the media don’t teach this.
This argument is about nothing !
Nothing will change for better unless the money itself is changed !
Please no gold standard !
Read Silvio Gesell and you will understand.
I guess you don’t think of Zimbabwe as being bankrupt either eh? You’re splitting hairs.
no one is willing to send goods/services to Z for their money
you can not say the same for the USA
“What can you mean, Paul, by your scenario in which “the US government [cannot] sell bonds on international markets”? All bond markets are international. Does it matter whether the buyers are “foreign” or “domestic”? Of course it doesn’t. It’s just as foolish to worry that foreigners might not buy our bonds, as it is to worry that they own too many of them now.”
this is too smart by a half. look at japan, whose sovereign debt is overwhelmingly owned by japanese, primarily japanese households.
a sovereign issuer should always worry about markets for its debt. of course it matters for the sovereign issuer if its markets contract in scope, depth or vibrancy.
there is a long run between pointing out that we can notch up fed reserve accounts at the touch of the return key and that it doesn’t whether the market for your bonds is diverse.
as with so many of mmters (yes i’m looking at your cullen), the stridency with which the claims of mmt are made does a disservice to mmt’s very valuable analytical contributions.
TPC
These 3 posts (the latter one being above) were GREAT! (Tony the Tiger, style – grin).
I no longer even read PK anymore – it’s too much of a joke…
Also, I loved Warren Mosler’s Reuter’s reports – man, I hope the word spreads.
Dr Jamie, thanks for the comment & visiting, sir.
I by no means desire to insult PK. As I’ve said before, I think he’s one of the most influential and important economists of our lifetime. I just think he hasn’t taken the time to fully consider the MMT position. Perhaps I am wrong. But I certainly don’t mean to undermine or attempt to discredit his impressive and substantial body of work. Not that I could ever discredit it if I tried….
Again, even if we assume we can never go broke as a nation does not mean we are a prosperous country.
If you believe that 10% of the households own 85% of all financial assets, does it really make a difference that the country can pay its bills, when 90% of the citizens are living paycheck to paycheck (if they even have a paycheck)?
Don Levit
Right, which is why policy needs to be altered dramatically in order to accept this reality and offer aid to the people that really caused this crisis. No more bailouts. No more tax cuts for the rich. Let’s recognize the root cause of the current malaise and utilize our govt to actually solve the problem.
Fat chance when the top 10% own the media which ‘teaches’ the 90%.
more like the top 1% (actually .1%) vs 99%-ers.
This issue is way above the foundation of MMT. Deciding when to hit the keys on the computer to issue money and what to spend it on is a subject of a many different threads.
The good first step would be to build on the MMT foundation, simplify the process, policies, agencies and regulations. 1) End the FED; 2) End the US Trsy/Bond market; 3) reform tax code (end corp and income tax, implement a consumption tax and capital gains tax; 4) restore constitutionally sound gov’t and most importantly restore the equal rule of law to reduce/eliminate fraud and corruption. Get rid of lobby and campaign influence (bribes). Then let the political games and policy making begin with a much smaller gov’t and a truly competitive free market system.
“Conclusion: A government that issues its own currency and owes its debt in that currency cannot be insolvent.”
If this statement is true, then there is little need for debate nor economists…
Just for the recorder, Mr Roche, do you favor liberal economists such as Klugman and Galbraith and others?
Depends on the environment. I don’t filter my economics through my political filter. I approach each environment as its own and each environment requires a different approach. I have been in favor of tax cuts, no bailouts, greater bank regulation, and a focus on Main Street in recent years. I was a harsh critic of many of the spending plans (cash for clunkers, focus on healthcare, homebuyers tax credits, etc) so I don’t know exactly how one would describe my politics in recent years. Pretty centrist if you ask me….
Thank you, Mr Roche, I appreciate your comments! I do not wish to go off topic and perhaps you will have a thread on this topic, one of these days…
Sooner or later, theory is translated into action and thus an appropriate label maybe applied..