Krugman Bask on Bond Vigilantes
Krugman today yet again gives IS-LM all the credit for leading to his good predictions on interest rates. (I’m not being sarcastic; Krugman publicly was saying interest rates wouldn’t spike, when others were.)
But I would like someone to show me where Krugman has actually used the IS-LM model to explain two different things:
(A) Why the bond vigilantes wouldn’t attack the U.S. Treasury.
(B) Why the bond vigilantes attacked Iceland, Ireland, Greece, and (somewhat) Spain.
For example, in this post Krugman actually doesn’t use IS-LM at all (at least explicitly), and has this offhand remark about Greece:
Also, if you think that US interest rates are being held down by the fact that in some sense the Treasury hasn’t had to go to the market lately, since the Fed is buying debt — although the Fed isn’t actually buying it direct from Treasury — consider the case of Greeece. Greece isn’t going to the market at all these days, since it’s getting all its funding from the bailout package. That hasn’t stopped the 10-year interest rate on its outstanding debt from reflecting investors’ perception of its underlying solvency.
So suppose the government keeps running $1 trillion+ deficits, and then Rick Perry takes the White House in 2012. Then U.S. interest rates suddenly do spike. Couldn’t Krugman just say, “Oh, well this is now because the idiot Republicans are making investors worry about the necessary tax increases down the road. The solvency of the government has been called into question, and that’s why interest rates are up. IS-LM wins again!” ?
Let me say it in other words: In the quote above–where Krugman is explicitly contrasting his “Pimco’s Bill Gross is wrong about QE2 ending” call with what is going on in Greece–Krugman didn’t use IS-LM. He used the much more obvious and simplistic, non-liquidity-trap “model” of saying (paraphrasing), “Investors are attacking Greece because they’re worried it can’t service its debt, but they aren’t yet worried about the U.S.”
That’s fine, but that’s not IS-LM. There’s nothing Keynesian about that at all.
“Greece isn’t going to the market at all these days, since it’s getting all its funding from the bailout package. That hasn’t stopped the 10-year interest rate on its outstanding debt from reflecting investors’ perception of its underlying solvency.”
This has to do with the fact that Greek bonds are used as collateral for short-term repo loans from the ECB which are frequently rolled over and in the case of US Treasuries the FED just buys them on the secondary market and the investors needn’t worry about them anymore. Or at least that’s how I interpret that difference between Greek and American yields when in both cases the bonds are being “bought up” by their respective central banks.
Looks like IS-LM only applies when it can correctly predict interest rates.
Krugman is clearly being inconsistent. On the one hand (US) he claims interest rates are a function of IS-LM. On the other hand (Greece) he claims interest rates are a function of market penetration and solvency. What would IS-LM predict rates to be in Greece? Exactly what they currently are not.
Sovereign currency issuers cannot go insolvent. Investors are buying US debt at “high” prices in part because the US cannot go insolvent, and in part because Europe and Asia and the US are going through a prolonged economic slump. Investors flock to the debt issued by the safest sovereign currency issuer: the US. This is the case even if the Fed monetizes a substantial portion of US debt of all maturities.
So suppose the government keeps running $1 trillion+ deficits, and then Rick Perry takes the White House in 2012. Then U.S. interest rates suddenly do spike. Couldn’t Krugman just say, “Oh, well this is now because the idiot Republicans are making investors worry about the necessary tax increases down the road. The solvency of the government has been called into question, and that’s why interest rates are up. IS-LM wins again!” ?
Expect MMT heads to spin.
Maybe he has two, non mutually exclusive explanations for what’s occurring in a complex economy. Maybe even three or four!
Try searching his blog.
He’s always used IS-LM to counter the crowding out argument.
If you don’t understand the distinction, between crowding out and solvency, here is a short post explaining it.
http://krugman.blogs.nytimes.com/2011/07/14/interest-rate-stories/
To combat the solvency argument in the U.S., PK has always just used numbers and done back of the envelope calculations. Here is one example:
http://krugman.blogs.nytimes.com/2011/08/11/franc-thoughts-on-long-run-fiscal-issues/
Krugman has never argued deficits never matter:
http://krugman.blogs.nytimes.com/2010/07/17/i-would-do-anything-for-stimulus-but-i-wont-do-that-wonkish/
http://krugman.blogs.nytimes.com/2011/06/19/the-obstinacy-of-error-interest-rates-edition/
Next time you have a question, you should probably just search his blog for a few minutes.
Charlie,
Thanks, this is good. In response to your last (sarcastic?) sentence, I read Krugman’s blog religiously.
The problem is that I think he is conflating two different things. When some people on “the right” say, “The US is in store to be the next Greece if we don’t get our spending under control,” that could be taken to mean that “high budget deficits lead to high interest rates” in addition to “a dangerously high debt can lead to high interest rates because of fear of default.” So you see how the two can be related.Oops just checked your link on two different interest rate stories, Charlie. Krugman is tackling the issue and saying it’s austerians who are conflating the two things, which is fair enough. (Meaning, I can see why Krugman would think he has adequately handled either scenario and isn’t contradicting himself.)
Bob,
I don’t check your blog that often, but most of the time when I do your blog posts seem driven by a lack of understanding of an opponent’s positions. This Krugman post is a perfect example. This is a topic he’s written extensively on. It took me 10-15 minutes to search the blog find a few relevant posts. I don’t even think I found the best examples (the volume of work is getting quite large and older posts are harder to find).
To show this isn’t an isolated incident here is another example from yesterday. You say, “Ohhh, so Paul Krugman would never, say, take Peter Diamond’s winning of a Nobel as evidence that Republican opponents of his views on monetary policy were a bunch of idiots…”
But in the post you link, he’s not arguing that Republicans were idiots, because they disagreed with Diamond on monetary policy. He’s arguing that the Republicans think Diamond is not qualified to be on the FOMC. In the post, he links to this statement:
“Professor Diamond is a skilled economist and certainly an expert on tax policy and on the Social Security system,” Shelby said July 28. “However, I do not believe he’s ready to be a member of the Federal Reserve Board. I do not believe that the current environment of uncertainty would benefit from monetary policy decisions made by board members who are learning on the job.”
Then Krugman points out that Diamond didn’t just work on tax policy and SS, he won a nobel for work on unemployment, “Because right now one of the hot topics is whether the apparent shift in the Beveridge curve signals a rise in structural unemployment — and Diamond wrote the seminal paper on the whole subject — the top result on Google scholar.” You could make counter arguments to defend Sen. Shelby, but not the one you actually made. Sen. Shelby is not Diamond is very qualified, but doesn’t have correct views of monetary policy.
I see you commenting over at Scott Sumner’s blog, and there is a similar phenomenon. Your comments often reveal that you don’t understand his argument very well. You ask questions he has answered in multiple long blog posts. With both Krugman and Sumner, you claim inconsistency on points they’ve been very consistent on, yet, you don’t seem to be able to read a short blog post in the context of all the other posts (which is extremely important).
Again, I’m not saying that your arguments are wrong. I’m saying you aren’t in the argument at all. For instance, it’s perfectly reasonable to say that Krugman is wrong about the U.S. If we take into account off-budget liabilities… If we have slow growth… Fiscally induced inflation… There are plenty of reasonable counter-arguments. You just have to understand the argument at a deep level to make them.
I don’t know why you have trouble keeping track of the views of others. Maybe it’s biases, maybe you just read a lot and can only keep so much in your memory. But next time you write about someone being inconsistent, try taking an hour to search the person’s blog and read many posts they have made on the topic. Try to build the best version of the other person’s argument, and then try to point out the errors.
It would make your blog better.
I think there are two separate issues that Krugman focusses on:
– In a liquidity trap interest rates will stay low irrespective of CB action to buy or sell debt.
– If investors fear a government default then interest rates on its debt will go up anyway even in a liquidity trap and even if that government is not actually issuing new debt.
His overall point is that in both cases interest rates are not tied to government debt issuance which I think he would claim is based on IS-LM analysis. In other wordss: IS-LM will say that interest rates will be low, but fear of default will drive them up.
“Why the bond vigilantes attacked Iceland, Ireland, Greece, and (somewhat) Spain”
The better question is what do all these countries have in common? Answer: none of them have all liabilities denominated in a free floating, non convertible currency which they are a monopoly issuer of. It really is that simply. It baffles how folks make the same mistake over and over again…but I guess when ideology trumps evidence, heads can keep banging against walls (and that includes Krugmans head) indefinitely.
“Then U.S. interest rates suddenly do spike”
Why? The Fed could guarantee any rate for any bond on any part of the curve, just like it does for the overnight rate.
“Expect MMT heads to spin.”
Nah. We actually understand what drives rates of government securities in a free floating, non convertible monetary system. I’m surprised Austrian economists don’t have giant bruises on their foreheads by now!!!!!!
For what it’s worth, I think a better understanding of market processes would alleviate the worst examples of MMT confusion. For example, I’ve never heard a nutty zero-natural-interest-rate promoter say “I want to replace government bonds issuance with money drops.” [I think this is what they are actually saying, but most don’t realize it]. Instead, they confuse their theory, which implies that bonds and cash _can be made_ fungible, with a reality in which bonds and cash _are not_ fungible.
Further, better market analysis will (hopefully) keep MMTers from making foolish statements like “MMT explains low interest rates.” Unless the Fed explicitly fixes the interest rate at maturity M to some rate R [and enters the bond market whenever the rate deviates from this number], MMT has _no_ explanation of why the interest rate is R. The rate is the outcome of buyers and sellers on the market, not “functional finance.”
MMT explains current low interest rates, and all the rest.
Issuing bonds in the case of an inconvertible free floating currency is just an interest rate maintenance operation. Otherwise interest rates fall to the interest rate paid on reserves.
So the central bank determines short interest rates and long interest rates are the expectation of short interest rates.
> Issuing bonds in the case of an inconvertible free floating currency is just an interest rate maintenance operation.
What evidence do we have that the Fed is “controlling” the whole curve? Not saying they can’t [at least in nominal terms]. What is the evidence that they’re doing it?
> Otherwise interest rates fall to the interest rate paid on reserves.
I don’t really know why you think this should be true. For example, this interest-on-reserves thing is a new policy. Before it was added, interest rates on reserves were zero. Follow me so far? So why were zero coupon bonds not trading at par in that period? Why did bond-implied rates not fall to match reserve-interest-implied rates?
Operation Twist.
0% is an interest rate, and interest rates will fall to IOR if bonds are not issued to drain excess reserves.
Correct me if I’m wrong, but Operation Twist size is specified in notional terms [400 billion?] Not in rate terms.
I don’t understand the second part. What does IOR stand for? Is this a response to why zero-coupon bonds did not trade at par?
An MMT operation twist would target the price by buying and selling at a particular price towards the end of the curve. The quantity would not be a target and just the result of the operation.
i.e. it’s about price not quantity. So in your example, that would be an operation twist where a quantity is targeted.
IOR = Interest on Excess reserves.
In a corridor system, the overnight rate is bounded by the discount window rate and the rate paid on excess reserves due to arbitrage. However, imperfect institutional structures, such as in U.S. where some institutions lack access the window can potentially lead to a rate slightly outside this corridor.
What MamMoth is saying is that because banks in the aggregate cannot create or destroy reserves, they can only shift them around, an excess reserve position will see the overnight rate fall to the floor, which in a corridor system will be the rate paid on excess reserves.
No one disputed the Fed’s ability to do what you’re describing in notional terms. The claim was that if the Fed _does not_ target the rate, functional finance cannot explain the rate. Further, since the Fed is _currently_ not targeting a rate, functional finance cannot explain the current low rates of interest. You need to bring other concepts into your theory, like liquidity preference or supply glut, etc.
By doing so, you would be providing an argument why the treasury rate need not match the IOR rate.
” “I want to replace government bonds issuance with money drops.” [I think this is what they are actually saying, but most don’t realize it]”
Uh, no, not what we are saying, at all. Money drops result in new financial assets. Replacing a 2.1% 10 year ‘note’ with a zero percent perpetual changes duration and interest income, but does not change private sector financial assets. Nor does it change credit risk of the security issued by a monetarily sovereign issuer.
Could you maybe help us out and explain the difference between a zero coupon perpetual note and a fixed rate bullet, other than differences in duration and income? Is credit risk different?
“The rate is the outcome of buyers and sellers on the market”
While it’s true short term technical factors do influence rates on a day to day basis, however, over time rates are determined by expectations of the overnight rate, which obviously is dictated by policy. Bob Roddis has been stalking on these sites for a few years now…ask him where I thought the 10 year was going at 4%. Then at 3%. Then at 2.5%. Why was I so sure? Because it was obvious the Fed was not raising rates anytime soon, and anyone who thought credit risk had anything to do with the direction of rates is eating their words as we speak. Just look at how many widows shorters of JGB’s has made over the years. Same deal.
What’s funny about this whole debate is if Austrian ‘economists’ recognized the true risk free nature of treasury securities, then they would agree the true risk free rate is zero, and the market should determine borrowing rates by adding a spread to this zero rate and policy would be completely removed from the equation. Hey, a free market solution, imagine that. Those MMT’ers might be on to something. By not acknowledging the true rate on US securities is zero under the current monetary system, you are, in many regards, anti free market…much like how advocates of a fixed currency (gold standard) are also anti free marketers in disguise.
> Uh, no, not what we are saying, at all. Money drops result in new financial assets. Replacing a 2.1% 10 year ‘note’ with a zero percent perpetual changes duration and interest income, but does not change private sector financial assets. Nor does it change credit risk of the security issued by a monetarily sovereign issuer.
Zero coupon perpetual?!?! Wow.
Let’s go through this one step at a time. If I bought a zero-coupon perpetual then (1) I would give up the price of the bond [call this P], (2) I will claim ownership of a bond with some notional amount specified [call this X], (3) I will never receive any coupon payments for holding this bond [or equivalently, I will receive a payment of size 0 every “period”], (4) I will receive X if I am paid back, and (5) I will never be paid back.
How much would I be willing to pay to _hold_ this instrument? I would personally pay nothing. If you feel differently, then I will happily sell you some of these.
Now there is one caveat. It is _possible_ that there’s some money creator out there who will FIX a price for these things. That is, they may guarantee that anyone who bring them such a bond can get Y dollars for it. In this scenario, P need not be zero. It may be quite close to Y. The instrument creator created [dropped] (Y-P) into the economy. We can probably expect this number to be approximately zero due to arbitrage.
Now this perpetual has not changed interest income in the system [since the original cash did not pay interest]. It has also not _really_ changed the average bond duration. The easiest way to think about this is to think of the instrument buyers as _immediately_ turning in the instrument for cash. In this scenario, we go from cash [with zero maturity] to outstanding perpetual [with zero market lifetime] to cash [with zero maturity]. If people are lazier about turning in their bonds, then I think it’s because _they_ are thinking of the instrument as cash-equivalent. And they will treat it as such. To consider this as “increasing average duration” is… creative, but not exactly correct. You’re trying to use this issuance as an excuse to jam “cash” into your duration calculation. If you had included it from the beginning, then you would see that duration has not changed at all.
Now if you wanted to replace a 2.1% 10 year ‘note’ with one of these, you would probably need to pay whatever the market price of the 2.1% bond is. If that bond is currently trading at B, you will need to issue a perpetual which can be turned in for B.
> Could you maybe help us out and explain the difference between a zero coupon perpetual note and a fixed rate bullet, other than differences in duration and income? Is credit risk different?
Someone should double-check what I’m writing, but I believe a fixed-rate bullet has fixed coupon payments [fixed in notional terms] and pays back par value at maturity. A zero coupon non-perpetual has no coupon payments and pays back par value at maturity. A zero coupon _perpetual_ has no coupons and NEVER pays principal. The first two types have duration and credit risk [since there is a payment in the future, there is a risk of that payment not happening]. A zero coupon perpetual has “infinite duration” [payment never coming] or “no duration” [all payments which will ever come have already happened]. It cannot have credit risk. There may be some freakish “Fed risk” [the odds that the Fed will actually turn you away when you go to turn it in, but this is probably unlikely].
> What’s funny about this whole debate is if Austrian ‘economists’ recognized the true risk free nature of treasury securities, then they would agree the true risk free rate is zero, and the market should determine borrowing rates by adding a spread to this zero rate and policy would be completely removed from the equation.
The market does not value zero coupon (non-perpetual) bonds at par… and this is the fault of Austrian economists? FYI, risk-free returns would not be enough to get this rate to zero. Time preference would also need to drop out. As long as my “safe” bank is willing to pay me high rates, I don’t expect government rates to be zero.
How many dollars, I mean zero coupon, perpetual notes, do you have in your pocket right now? If you don’t want them, I’m sure the guy next to you will take them.
As soon as the IRS stops taxing me in US dollars, and allows people to trade in any currency they want, then you can have my US dollars in exchange for whatever the current market price of gold happens to be.
Hey hey…somebody gets it!!! Bravo!
I do have some USD.
If you offered to sell me a piece of paper that said “US government zero coupon perpetual,” and the Fed _did not_ want to give me USD for it, then I would pay zero for it.
If the Fed _did_ want to pay me for it, then I would treat it as cash equivalent.. Further, any “net” creation of these things would be “net money drops.”
I hope this “MMT as money drop” thing is making sense now.
Right, I often see a distinct lack of awareness that, when you issue new, perpetually-rolled over debt, you are increasing the money supply without (inflation-)offsetting demand.
I don’t quite follow what you mean here:
For example, I’ve never heard a nutty zero-natural-interest-rate promoter say “I want to replace government bonds issuance with money drops.” [I think this is what they are actually saying, but most don’t realize it]. Instead, they confuse their theory, which implies that bonds and cash _can be made_ fungible, with a reality in which bonds and cash _are not_ fungible.
‘Money drops’ always occur due to government spending. Bonds (as well as other institutional arrangements such as Tax and Loan accounts) function to offset the reserve effect of these money drops.
I am interpreting your use of fungible to mean ‘interchangeable’. MMT would say that they are not always interchangeable. There are many cases when government bonds fail to find a purchaser, this can be due to a variety of reasons, such as, the banking system is deficient in reserves, or wishes to hold more reserves, other reasons would be due to the preference for the form in which agents wish to hold their savings.
>“MMT explains low interest rates.”
Post Keynesians argue that 1. the central bank has a monopoly on the issuing of reserves. so it can either target price or quantity. 2. the central bank has no choice but to provide the necessary amount of reserves, otherwise they threaten the viability of the payment system, etc. So interest rates are always anchored by the central banks target rate (short-term nominal rate). However that doesn’t mean that there won’t be variation in various market rates along the curve. Furthermore, the interest rate (referring to the central banks short-term nominal rate) is treated as an exogenous variable. The reason why it is a particular value depends on the factors in the central banks decision.
>The rate is the outcome of buyers and sellers on the market, not “functional finance.”
Which rate are you referring to? This sounds suspiciously like some ‘loanable funds’ model.
> I don’t quite follow what you mean here:
For example, I’ve never heard a nutty zero-natural-interest-rate promoter say..‘Money drops’ always occur due to government spending…
Please see exchange above with AP Lerner. You are saying what *I* said. He tried to counter that “no, we’re talking about zero coupon perpetuals, not money drops.” So then we looked at the implications of such perpetuals and concluded that the Fed would need to fix their price, at which point they would become money drops.
BTW, I _don’t_ think you’re one of these nuts who walks around proclaiming that “the natural rate of interest is zero.” Your analysis is much more “vanilla post-Keynesian” with operational facts. These is _not_ the analysis that the “zero rate” promoters are doing.
> Bonds (as well as other institutional arrangements such as Tax and Loan accounts) function…
I agree that this is their operational relationship to the reserves [what you called “ex post” in an earlier post].
> Which rate are you referring to? This sounds suspiciously like some ‘loanable funds’ model.
Just doing supply-demand analysis for a single market here. For example, a given bond issue, etc. The point is that if the Fed does not fix the price, then functional finance does not explain the price. Not trying to aggregate across different bond classes and analyze them as a “loanable funds” market here.
MMT definitely has the best explanation for why interest rates are what they are.
And they argue that IS-LM applies to fixed exchange regimes like the gold standard.
And what explanation is that?
“The Fed could guarantee any rate for any bond on any part of the curve, just like it does for the overnight rate. ”
This may be true in theory but if political considerations prevent it from happening in practice then I don’t see how you can conclude that interest rates will never spike on US-bonds.
“This may be true in theory”
Not theory. Operation fact.
This is a good example of MMT confusion. MMTers are generally not sure where the operational facts of their theory end and where the “theoretical” assumptions begin. They think it all falls under the operational reality umbrella.
It’s actually quite strange. You’d think that there’d be one _MMT economist_ who could figure out the difference and tell Mosler, who would then tell everyone else.
” the operational facts of their theory end and where the “theoretical” assumptions begin”
There are no theoretical assumptions with MMT; only operating realities. But, admittedly, the last word in the acronym does cause confusion, especially for those not willing to look past the acronym
So non-zero risk-free rate is a part of MMT now? Because that’s the operational reality when the Fed is not fixing the rate.
I like this zero-coupon-bond-non-perpetual-at-par example. It is simple enough that every MMTers can understand the operations.
If you can use MMT to “explain” this, then you are giving an explanation for why the “natural rate” need not be zero.
If the theory says it “should not” happen, then it’s clear that the theory does not map to operational reality.
“you are giving an explanation for why the “natural rate” need not be zero”
Why? If the government, who is the monopoly supplier of the currency, has zero risk of solvency, then why should it have a positive rate? It’s risk free? Sure, you can account for duration if the government issued longer dated securities, but why should the government issue longer dated securities if they do not fund anything?
“I like this zero-coupon-bond-non-perpetual-at-par example.”
Also known as currency.
I think you are not understanding the post. It talks about _non-perpetual_ zero coupon bonds.
These are not currency.
They typically trade at a discount to par.
Is this discount “natural” ? If so, then it seems that the natural rate of interest need not be zero, right?
If they are not natural, then your “theory of what is natural” does not describe operational reality.
“I think you are not understanding the post. It talks about _non-perpetual_ zero coupon bonds.
These are not currency.”
No, you are not understanding the post. I’m the one that compared zero coupon perps to currency, since there is no difference between currency and a zero coupon perp issued by the government. I was making a point (which clearly did not go over well).
The point is there is zero reason for a monetarily sovereign government to issue securities with duration or interest, since those securities fund exactly zero spending. They should just go ahead and issue zero coupon perps, or currency or fund spending.
Relax. There’s no need to flail about. I was pointing out that you either don’t understand, or are hesitant to address my question about zero coupon non-perpetuals and why they don’t trade at par.
I hope we can now stop talking about the “naturalness” of the zero interest rates… their advocates are trying to elevate their normative judgments [eek! risk-free interest income!] into their explanatory “theory.”
I also hope the next time someone writes that “MMT is basically the economics of money drops,” you don’t need to make us watch the “zero coupon perp bond” circus again. You can just come back to this page and read my explanation of why there are either zero or cash equivalent.
But there are many examples of countries with “free floating, non convertible currency which they are a monopoly issuer” which have borrowed heavily, inflated their money supplies, come under pressure on the bond market and ended up defaulting on their repayments.
Are you saying that they were just not reading the right MMT text books ?
“free floating, non convertible currency which they are a monopoly issuer”
And with all liabilities in that currency.
Name one please.
And please don’t say Weimar or Zimbabwe since Weimar was the direct result of a default following the Versailles punishment treaty and seizure of production by France (and in many ways had liabilities denominated in a currency they did not issue). And Zimbabwe had a supply side shock from a racist dictator.
So if you’re point is any institution can fail if enough idiots pilot the ship or our future is system of government is dictatorships, then yes you are correct and have sufficiently outsmarted me and other MMT’ers.
But if have any true examples of insolvency of monetary sovereign nations I’m all ears and open to learning something new.
The Fed has liabilities in other currencies like the Euro. What country has no liabilities in another currency?
Argentina had a free floating currency when it defaulted in 2002 (though I expect that it will not meet your criteria in some other way).
I’m not trying to outsmart you – just to understand your views.
Reading more carefully what you wrote above it sounds like as well as a “free floating, non convertible currency which they are a monopoly issuer” they must also only issue bonds in that currency to guarantee solvency. In this case it is clear that the govt could just print more money to pay the interest on bonds – but wouldn’t that be inflationary and itself would cause interest rates to rise as the currency depreciates.?
I can see that a rational government could in theory use taxation and bond-issue to control the money supply and interests rates (and presumably the AD curve) in the way you seem to be advocating , but I have problems accepting the likelihood of such a rational government and an equal problem seeing how all this intervention would not undermine the operations of a free market.
Argentina had a fixed exchange and a foreign debt when it defaulted in 2002.
The Fed currently has foreign debt. Presumably you guys think it is small enough to not matter. At what level do your operational realities become realities? (I’m not being sarcastic.)
It had a floating exchange (from Feb 2002) but foreign debt.
I bet the governments of many smaller and less stable countries have no choice but to issue foreign debt to fund their spending.
Argentina defaulted in december 2001, when they had a fixed exchange. I can’t remember which of the 5 presidents they had in one week took the decision.
“The Fed currently has foreign debt”
Debt or FX? I want to know exactly what you are talking about before responding?
@ AP
Yes I see now one additinal exception. Like Japan countries with big trades surplusses with the US, can stay clean of exposure to liabilities in foreign currency. But never all or even most.
And if every country tried to have big trade surplusses with the US, then this would have very weird results, don’t you think?
… sorry wrong place… posted it again at the right place..
AP Lerner wrote:
So if you’re point is any institution can fail if enough idiots pilot the ship or our future is system of government is dictatorships, then yes you are correct and have sufficiently outsmarted me and other MMT’ers.
But if have any true examples…
Isn’t there a fallacy named after this move, AP? So let’s make sure we understand your position: Since I first became aware of the MMT position, it has apparently evolved from “a fiat currency issuer by definition can’t be insolvent” to “it’s up to critics of MMT to show me a historical example of a government that defaulted on its bonds, that was not run by idiots or racists or lost a war and had stronger foreign governments impose harsh terms. You guys got nuthin’.”
Obviously a fiat currency issuer by definition can’t be insolvent, it can always meet any obligations in its own currency.
It’s a good exercise to try to find a country without a fixed exchange or foreign debt which did default on its debt (and there is one apparently, but I won’t tell you)
A govt. can choose to default even if it could alternatively print money to pay off some of the debt.
I somewhat believe that political pressure may make default more likely than monetizing the debt (or at least the interest on the debt ) in the USA should the situation arise.
Doesn’t mean all this that your MMT theory entirely depends on the precondition that a country has to have the privilege of issuing the world’s reserve currency?
That would mean that MMT only works for one country only in the world. What are the other countries supposed to do?
And even then I think you are heavily underestimating the probability of losing that privilege one day.
Rob,
>A govt. can choose to default even if it could alternatively print money to pay off some of the debt.
This is correct. The MMT position is that it isn’t due to any underlying economic reasons, rather it is due to political reasons.
BTW, government spending is always ‘printing money’.
“Doesn’t mean all this that your MMT theory entirely depends on the precondition that a country has to have the privilege of issuing the world’s reserve currency?”
No. See Japan
@ AP
Yes I see now one additional exception. Like Japan countries with big trades surpluses with the US, can stay clean of exposure to liabilities in foreign currency. But never all or even most.
And if every country tried to have big trade surpluses with the US, then this would have very weird results, don’t you think?
Bob,
From my understanding:
the MMT position has always been that a country which has a monopoly on its currency faces cannot go insolvent in its own currency, but it can default due to political reasons. Among these reasons could be the incompetence of those in government.
Real constraints could arise because the government wishes to employ the private sector into digging and filling holes. If this was significant enough the productive capacity of the economy would suffer as capital slowly wears down, and is not replaced. Furthermore labour productivity would also suffer because you’d have all these people will skills in digging holes and filling them, but little in the way of producing real goods and services. A trend of rising prices would occur, as the productive capacity of the economy began decreasing.
A war is similar in some sense, so is losing a productive region to another country (Germany) and removing productive farmers from their land (Zimbabwe).
So, I dont really see how this could be a change in the MMT position.
btw, hope that’s clear. It’s been a long day.
“MMT position has always been that a country which has a monopoly on its currency faces cannot go insolvent in its own currency, but it can default due to political reasons”
Exactly. Since Mr. Murphy took so much time to write a thoughtful critique a while back, he knows this, but chooses to ignore it since it does not fit his story.
“Real constraints could arise ”
correct.
“So, I dont really see how this could be a change in the MMT position”
Perfectly clear, logical, and accurate. Thank you for the honest, logical commentary, which seems to be lacking on this post. Whethere or not you agree with MMT point of view is irrelevant, I’m glad you have taken the time to get your facts straight before entering the conversation.
> Real constraints could arise because the government wishes to employ the private sector into digging and filling holes.
Maybe I’m missing something, but isn’t mdm just giving a Post Keynesian analysis here?
I understand AP’s desire to peer over his shoulder and shout “Yeah!” Especially since mdm (1) does not openly trash the “MMT brand” [as I would do] or (2) write anything that is logically inconsistent.
That said, where is _this_ explanation of real constraints in the MMT literature? Mosler certainly doesn’t state the dangers of “capital goods deterioration” in 7DIF.
“it’s up to critics of MMT to show me a historical example”
Actually, I never said that. Someone above posted “there are many examples of countries with “free floating, non convertible currency which they are a monopoly issuer” which have borrowed heavily, inflated their money supplies, come under pressure on the bond market and ended up defaulting on their repayments” and I simply asked for an example (which I am still waiting for). Please don’t put words in my mouth. It’s a debate technique you use freqently with me, and it’s annoying.
“You guys got nuthin’”
Except facts.
And history.
I’m sorry, but if you don’t want to acknowledge the difference between Weimer and Zimbabwe and the US, then let’s face facts, you’re not interested in an honest debate. You’re more interested in introducing extreme events that have little relevance to the modern monetary system to support an ideology that is lacking hard evidence and facts to support its insane claims on government solvency, inflation, etc.
So if you’re base case is the US heading in the direction of dictatorship or Ron Paul is going to win the election and just not honor government securities, then my new base case is you have zero interest in honest, realistic debate, are more interested in data mining and looking for confirmation of your bias’ and should drop really drop the title economists from your title.
AP,
When Bob wrote “You guys got nothin'” he was paraphrasing you in your critique of his position. He wasn’t saying that MMTers ‘got nuthin.’ (And based on this last comment by you, I think it was fair for Bob to paraphrase you in the manner he did).
“He wasn’t saying that MMTers ‘got nuthin.’”
If this is true, then I apologize for the rant. But when a comment starts with ‘Isn’t there a fallacy named after this move’ and ends with ‘You guys got nuthin’’ I read between the lines and believe he is calling me inconsistent and saying I’m guilty of moving goal posts, which is 100% false…this doesn’t sound paraphrasing to me. This sounds like a pretty direct personal attack, not a disagreement of point of view. But I’m open to being wrong on interpreting blog speak.
The irony is that your comment above starts with you accusing him of misquoting you.
..Not to mention the irony of getting in a huff about a supposed ‘direct personal attack ‘ by Bob when you accuse him of ‘data mining’, and being ‘ideaological’, etc., etc. all the time….
“Bob when you accuse him of ‘data mining’, and being ‘ideaological’, etc., etc. all the time….”
How is that a personal attack. At no point did I misquote him, or twist his words. Pointing out examples of data mining is like pointing out the Earth is round, which some seem to forget from time to time…
AP,
You got upset because you thought Bob was accusing you of engaging an idealogical ploy; employing a logical fallacy in the hopes of refuting an argument.
You accuse Bob of this all the time. Whether you are correct to do so or not does not change that fact that, by your definition, such accusations are ‘direct personal attacks.’
To AP Lerner:
Some others have clarified what I was doing there. Yes, I was accusing you of the No True Scotsman fallacy. In my defense, I’m pretty sure you engaged in the No True Scotsman fallacy.
Then, I said that I had detected a shift in the MMT line over the months. In the beginning, you guys I thought were saying, “Since the gold standard ended in 1971, we are in MMT world, and you Austrians are using an outdated model.”
But now it seems your latest position is, “We MMTers defy you Austrians to name a historical example of a country that defaulted, where that country wasn’t run by a dictator, or a bunch of idiots, or had just lost a war.” That is decidedly less sweeping than the first.
And right, I wasn’t saying you MMTers got nuthin, I was saying that you were accusing us Austrians of having nothing, even though we have given you tons of examples of countries that default, for each of which you have an excuse for why it’s no problem for MMT.
(In my defense, I did use quotation marks to indicate what words I was putting in your mouth.)
hi,
krugman’s is-lm analysis covers the spain, ireland, italy situation when you consider them in terms of part of currency union. that is a crucial difference as it means the countries in question do not have as independent a monetary policy as the u.s.
“But there are many examples of countries with “free floating, non convertible currency which they are a monopoly issuer” which have borrowed heavily, inflated their money supplies, come under pressure on the bond market and ended up defaulting on their repayments.”
Anyone have an example of this. As was noted above, Argentina is not accurate since they had foreighn debt and a pegged currency.
I’m now persuaded that a government that is a monopoly issuer of currency never needs to default on bonds it issues in that currency (I’m not sure why “floating” matter since surely they could stop the float just before they inflated the money supply to pay off the debt?)
I’m not sure of the relevance of this to anything important though. If a govt is thought to be about to inflate to meet it debt obligation it will face high interest rates anyway and it may then have to issue bonds in a foreign currency anyway.
It certainly isn’t going to help the rest of the economy to know that at anytime the government can just print up bits of paper that will give it bigger share of net wealth.
Give me a commodity currency any day!