The Right Coast

Editor: Thomas A. Smith
University of San Diego
School of Law

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Monday, November 26, 2012

Don't worry, be happy, the Debt is not a problem
Tom Smith

So here is Doktor Professor Krugman saying that that big Debt and the deficits that keep adding to it are not a big problem:

You’ve heard the story many times: Supposedly, any day now investors will lose faith in America’s ability to come to grips with its budget failures. When they do, there will be a run on Treasury bonds, interest rates will spike, and the U.S. economy will plunge back into recession.

This sounds plausible to many people, because it’s roughly speaking what happened to Greece. But we’re not Greece, and it’s almost impossible to see how this could actually happen to a country in our situation.

For we have our own currency — and almost all of our debt, both private and public, is denominated in dollars. So our government, unlike the Greek government, literally can’t run out of money. After all, it can print the stuff. So there’s almost no risk that America will default on its debt — I’d say no risk at all if it weren’t for the possibility that Republicans would once again try to hold the nation hostage over the debt ceiling.

But if the U.S. government prints money to pay its bills, won’t that lead to inflation? No, not if the economy is still depressed.

Can this really work? I admit reluctantly that I am not a genius like the good Doktor Professor. For me to understand something, I have to have something like a simple model. I get how the Fed can increase the quantity of money. I get how they can make it easier for banks to lend. I even get how, if people are saving money in their mattresses, fiscal policy (i.e., taxation) can get money out of mattresses into wage earners' pockets, which they will then spend on food and beer or whatever.  But that doesn't seem to be our problem now. The Fed keeps on printing money and that doesn't seem to be helping. Indeed, I have a hard time seeing how printing money would make people increase their economic activity, unless it was such things as buying physical assets to protect themselves against anticipated inflation.  Krugman's reassurances that the market shows no sign of thinking Treasuries aren't good as gold does not reassure me much. Markets can change their minds very quickly. Just ask Enron (PK has their number already, though it may have been disconnected).

Then there is this: The more money the Fed has put sloshing around out there, the trickier it will be to unwind their position.  How tricky? We don't know, because nothing remotely like it has ever been done before.  

http://rightcoast.typepad.com/rightcoast/2012/11/dont-worry-be-happy-the-debt-is-not-a-problem-tom-smith.html

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