15 Oct 2011

Aggregate Demanders Once Again Hit Below the Belt

Economics, Gold, Krugman 61 Comments

In the same spirit as Scott Sumner’s “if we eventually get high inflation, it will probably be due to tight money over the past few years,” I must also call the referee’s attention to this throwaway line from Krugman. After reminding readers that the Obama stimulus was in no way a “test” of actual Keynesian remedies, Krugman writes:

The other part of the story is the troubles of the euro area debtors. Never mind that these have nothing to do with stimulus spending, and that Spain and Ireland were actually fiscal role models before the crisis; this too is spun as somehow anti-Keynesian, rather than a reflection of the disastrous effects of imposing a nouveau gold-standard regime.

I mean really guys, c’mon: How in the world can you have a reasonable debate with your hard-money critics, if now a fiat currency that was explicitly designed from Day One by technocrats and that never had a link to commodity money is being used to discredit the gold standard? Give us a break.

61 Responses to “Aggregate Demanders Once Again Hit Below the Belt”

  1. Dan says:

    Yeah I have a friend that is worried that if Ron Paul wins that libertarians will get blamed for the collapse. I told him if Hoover is considered laissez faire then do you really think it matters? Free markets are blamed no matter how anti free market this country becomes.

  2. TGGP says:

    This is like when Cowen said that the failures of the 1930s Fed just shows how bad a world without a central bank could be, since he is considering the Fed without Benjamin Strong to be not a central bank at all (in contrast, Milton Friedman said if the Fed had not been created the Great Depression would not have occurred).

  3. Cahal says:

    The Euro has some similarity to a standard because governments cannot control their own monetary policy.

    • Teqzilla says:

      Sure, but both a lion and a chair have four legs. I think attempting to sit on one and then the other would soon remove you of the idea that this was reason enough to consider them near equivalents.

      • Cahal says:

        False analogies don’t really help anyone. The Euro is obviously different to a GS but some of the policy implications are similar, such as Greece having to deflate internally.

  4. jjoxman says:

    As I point out here: http://crankyprofj.blogspot.com/2010/11/european-imbalances.html and here: http://crankyprofj.blogspot.com/2010/11/euro-area-t-r-o-u-b-l-e.html Spain and Ireland were not going along swimmingly prior to the crisis, as Krugman would have us believe. The expenditures in PIIGS countries were outpacing revenue quite significantly prior to 2007.

  5. MamMoTh says:

    Euro countries are in the same position with the Euro as if they were under a gold standard (or they were until very recently when the ECB started to buy bonds). That’s a fact and not a matter of opinion.

    So the 1 trillion question is, can’t you really understand that or you do but you prefer to preach ignorance to a gullible audience because this is how you make your living? You can answer by email if you prefer.

    • Bob Murphy says:

      OK so even if every country had its own currency, then one bank in France (now back to issuing fiat francs) finds it has a liquidity crunch. The bank’s shareholders say, “If only we weren’t at the mercy of the Bank of France! Those tight-fisted fiends won’t inflate more and give us the francs! Gold standard strikes again!”

      • MamMoTh says:

        Right, if the Bank of France behaved as if it were a foreign bank, then France would find herself in the same situation as if it were under a gold standard.

        • Bob Murphy says:

          You’re paraphrasing though, Mammoth. I want you to explicitly say, “Anytime an institution wishes it could print more money but can’t, then that is ‘gold standard’ and shouldn’t count as a strike against the wonders of fiat money.” Is that what you are saying?

          • AP Lerner says:

            It’s not just about the ability to print money, Mr. Murphy. It’s about adjusting relative competitiveness by means other than wage deflation and unemployment, which you seam to embrace as the cure to all ills. I mean, when capital exits Spain. you do see the FX benefit that Spain lost by pegging it’s currency, right?

            Of course, what posts this really expose is the complete contradiction of libertarians/Austrian ‘economists’, the last defenders of freedom and liberty, are so willing to give up national and monetary sovereignty by fixing the currency. Isn’t it ironic, don’t you think?

            • Richard Moss says:


              You wrote:
              ” It’s about adjusting relative competitiveness by means other than wage deflation and unemployment, which you seam to embrace as the cure to all ills”

              By ‘wage deflation’ you don’t really mean ‘unit labor costs’
              again, do you?

              Otherwise, saying that wage deflation and unemployment go hand in hand is problematic.

          • MamMoTh says:

            Users of a currency are always at the mercy of the issuer(s) gold standard or not.

            In particular EZ countries find themselves in the same position as if they were operating under a gold standard and yield on government bonds are market determined which lead to the debt crisis in the periphery.

          • David S. says:

            The point is you’re talking about fixed currencies. This is econ 101, again.

          • Silas Barta says:

            The argument seems to be, “If I, as a failing dinosaur bank, don’t get a gigantic 0% interest loan from the central bank when I want it, that’s proof that the gold standard is economically disastrous, because obviously a good economy does not transmit useful information via interest rates or liquidity premia.”

            Some economists see interest rates as just a junk price that gets in the way of prosperity and can be modified without downside. Some say the same for land rents, or liquidity premia. They’re all wrong.

            • Major_Freedom says:

              They are like the rabid condemners of “usury” back in the middle ages.

    • Tel says:

      The fundamental problem here is that the Greek government borrowed more money than it has any ability to pay back. That is to say, promises were made that turned out to be impossible to keep. This can happen under the Euro, it can happen under a gold standard and it can happen under independent national currencies. In fact it has also happened to the US government and the US government is completely in charge of it’s own currency.

      In the US situation, the debt that the US government owes to China and Japan will not be paid back. The US is opting to use devaluation (and some inflation) as the means to achieve this, so China and Japan will be paid eventually in devalued US dollars. That is default… it is merely a backdoor method of default, that keeps up nominal appearances.

      In the Greek situation, they cannot use devaluation and inflation as mechanisms for defaulting, they must actually explicitly default, and that is what will happen.

      The end effect is exactly the same, merely the mechanism is different (and presumably the approach to negotiation).

      • MamMoTh says:

        That’s bullocks, you don’t define what a default is as you please.

        The US continues to pay its debt as promised, and will continue to do so as long as it wants to.

        Now the debt might never be paid in real terms because China and Japan want to keep running a trade surplus with the US which only benefits US citizens,

        • David S. says:


          At least MMT people understand this. Having countless millions of peasants working for us on the cheap is only good for us from a selfish perspective, and obviously reflects our superior position economically. It’s amazing how many ignoramuses there are in the world who get this exactly wrong.

        • Tel says:

          So are you saying that inflating your way out of debt by just printing more is equivalent to proper repayment?

          China has repeatedly stated that they do not agree with this position.

          Anyhow, if printing your way out of debt is quite reasonable then why shouldn’t I be able to print my own money to pay my tax? It’s exactly the same in principle.

          • MamMoTh says:

            So are you saying that inflating your way out of debt by just printing more is equivalent to proper repayment?

            The government always spends marking up bank accounts.

            China has repeatedly stated that they do not agree with this position.

            Who cares what they think? If they don’t like it they should stop running a trade surplus now. And stop manipulating their exchange rate.

            Anyhow, if printing your way out of debt is quite reasonable then why shouldn’t I be able to print my own money to pay my tax? It’s exactly the same in principle.


            • Major_Freedom says:

              The government always spends marking up bank accounts.

              Not all government spending that increases bank accounts is due to inflation. Governments can spend using the money they taxed or the money they borrowed as well.

              • MamMoTh says:

                That has nothing to do with the fact that government always spends marking up bank accounts.

        • Major_Freedom says:

          The US continues to pay its debt as promised, and will continue to do so as long as it wants to.

          Even if the inflation necessary to pay back the debt will collapse the US dollar reserve status, or maybe even the currency itself?

          • MamMoTh says:

            Even! As long as it wants to.

    • David S. says:


      Surely you’ve read Bob’s religious posts, along with the countless ones in which he can’t even interpret basic graphs and completely misses the points real economists make in real economic blogs. He’s just a cultist and nothing more.

      Bob is no economist and is in fact is worse than ignorant on economics, given that he actually seems to have confidence in numerous ideas that have been shown to be wrong again and again.

      • JJ says:

        OMG, I’m a member of a cult!!! Bob, how dare you not tell us that we’re all cultests!!! I will confess all to the next available policeman I can find!!!!

  6. AC says:

    But don’t worry, Paul Krugman is just doing science. There’s no ideology at all.

  7. Yancey Ward says:

    Damn Gold Standard Fed!! I need to print dollars and cannot!

  8. Bob Roddis says:

    There’s really no reason to further humor or “engage” the MMTers. We understand their “theory” and they refuse to understand ours.

    We understand completely the concept that the sovereign monopoly issuer of currency can create currency out of nothing and use it to purchase goods and services for itself and its hangers-on at the expense of the lost purchasing power of those holding existing currency. We get that. It’s called theft. Further, we get the idea that the sovereign monopoly issuer of currency can “pay back” its debt with funny money. We get that too. That’s called fraud and partial (or complete) default.

    That’s one of the main purposes of commodity money. It CONSTRAINS the government thugs from stealing, fraud and default.

    For a refresher, re-read Taylor Conant’s excellent smack down:


    • MamMoTh says:

      We understand the Austrian dogma. It’s about confusing flows and stocks; giving new meanings to words like theft and default to turn any discussion about economic concepts into a sermon; ignoring logic to the point of demanding axioms to be refuted; and believing smacking down strawmen is the same thing as a refutation.

      I believe we are even.

      So. Roddis, where’s the graph?

      • Bob Roddis says:

        What graph?

      • skylien says:

        Bob Roddis,

        I really don’t think it is a good idea to approach consequentiolists with arguments from morality. I do think that they also understand how the general argument goes of the Austrians. They just don’t accept that there are problems with capital structure that they could cause. That mainly monetary problems are there, and that their way of operating the currency can resolve them without hurting the capital structure in any significant way.

        Yet if you for the sake of the argument think they would be right, that they actually can minimize recessions and unemployment without any long run negative effects on the economy/capital structure, then wouldn’t you think: Yes it is still morally questionable that a monopoly department of government has the power to confiscate property (purchasing power) of its people at will without any direct return, but it is still a net gain for the average Joe because he enjoys a better economy and less unemployment, hence a net increase on the average in purchasing power. So it might be ok?

        I think it is just the wrong approach to engage the MMTers that way. It makes one look like a religious fanatic. It is better to keep it where the real issue is: The capital structure. And mention any moral points as a side note at max.

        It is easy to argue from morality if your argument is supported from a pure consequentiality stand point as well. For you it is a win win, no trade off involved.

      • David S. says:

        Don’t forget about having their own cult definition of inflation, which only causes confusion for people actually literate in economics who are uninitiated.

        • Bob Roddis says:

          I’ve been meticulous about using the phrase “money dilution” to differentiate it from relative price changes and general price inflation. You are the one who is confused. I also thought that the price inflation post 2008 would take a bit longer than others did to play out. I was right.

          Further, when has anyone else has used the term to represent money dilution, they usually say “inflate the currency”. Since you are too lazy to bother understanding even basic Austrian concepts, what purpose do you even serve?

      • Bob Roddis says:


        1. We start with English common law private property which most everyone understand as the norm. Most everyone understands the concepts of “my house”, “my car”, my money. This system has been in place for centuries, so we’re not recreating the wheel here.

        2. Keynesians, MMTers and monetarists then assume without proof that the process of voluntary market exchange leads to instability, unemployment, lack of “aggregate demand”, boom/bust and monopolies which is false and without any basis in fact or logic.

        3. MMTers especially have no understanding whatsoever of human exchange or economic calculation. AP Lerner claims that it no longer applies after 1971, which is preposterous. While the others are not so foolishly bold, their analysis ignores those essential basic features of human existence.

        4. MMTers talk about “operational reality”. I’m not sure there is a big difference of opinion with Austrians about how the funny money system issues funny money and moves it around. The problem with MMTers is that this is the point at which one employs economic theory to understand the impact of these policies. That is where Austrian Economics comes in. MMTers have no understanding of Austrian Economics whatsoever. Or political science especially the area of elections and their results and impact.

        5. When the MMTers describe the fiat state buying stuff in the first instance with new funny money, the functional mechanism is via the swiping [come up with a more neutral term if you can] of someone else’s purchasing power. You can try to put a neutral spin on that reality, but it does not change the “operational reality” or the mechanics of the operation. When MMTers and Keynesians try to move some “aggregate demand” to poor citizens, it is through the same mechanism. The term for that is Cantillon Effects which Mam-mouth and the others refuse to understand, much less acknowledge. I suppose you are right that if it “works”, who cares about the morality. But it doesn’t work, it is based upon “swiping” of others’ purchasing power and causes the boom/bust cycle.

        6. As Taylor Conant points out, Mosler’s analysis is based upon an unstated economic theory which he unscrupulously employs to suggest marvelous results from the issuance of funny money. Austrian Economics has demonstrated for 100 years there is no basis for such a theory, unstated or otherwise.

        • skylien says:

          I agree with you on the theory completely. But for the sake of having fruitful discussions, I only wanted to point out that arguments from morality cannot work on consequentiolists, else they would not be consequentiolists but moralists.

          I do believe that there are very very few real moralists. (I am neither). As written above for Austrians the moral side of the argument conveniently coincides with their consequentiolist argument. Yet too many Austrians use that and very often argue from the moral high ground, though they are not really moralists. And I understand their ideological rivals that they are annoyed by this. It as explained above isn’t working and additionally is mostly dishonest because most people including Austrians would as you state yourself not care about morality (only to a certain degree of course) if it works.

  9. Bob Roddis says:

    MMT guru Stephanie Kelton admits that there is a bit of a “distribution” problem with the unpayable debt:

    Stephanie Kelton: Just one point on the distributional issue, one of the things that you hear a lot about now is the growing size of the national debt and the growing interest burden, and we really need to make that a distributional topic, because it goes directly to this argument that we’re passing this on to the next generation and the generation after that, becomes a generational argument, which it absolutely is not, okay? All of the interest payments will be made by the people who are alive at the time the interest payments come due, and what we’re talking about is a shift of income from those paying taxes to those receiving payments because they’re bondholders. And so the bigger the share of the interest, relative to the size of the economy, the bigger the command of the goods and services the bondholders can wield against the rest of us. And so that becomes a discussion that we definitely would want to have. [01:05:51]



    • Tel says:

      Egats, she rewrites both history and biology. If you want a laugh, notice that she uses the word, “dollar” all the way through her speech… dollar denominated debts.

      But have these historically ignorant MMTers ever thought about why they use the word “dollar” and what it means?

      The original word was “Joachimsthaler” which was the place of origin of fine silver coins, later shortened to “Thaler” and then mispronounced as “Dollar”. So in fact, while disdainfully calling people “Metalists” for believing that modern money is the continuation of metal coin, Stephanie Kelton doesn’t even notice that the history of money is right there imprinted in her own language.

      • MamMoTh says:

        Fortunately we’ve evolved since then.

        No need to play dungeons & dragons in real life.

        • Major_Freedom says:

          If by “evolved” you mean some people started to use, and have since used, threats of violence against innocent people to maintain control over money production, then sure.

          The dragons are governments and the dungeon is where people who refuse to obey the dragons are put.

        • Tel says:

          That’s the generally accepted meaning of “history”, i.e. something that happened in the past.

          If you want to learn a lot about medieval times, you might try getting in a small room with a bunch of angry historians… and they aren’t angry to begin with, just try reading Stephanie Kelton’s speech to them.

          • MamMoTh says:

            If you want to learn a lot about medieval times

            What for? I am much more interested in what happened before, when money originated as credit.

            • Major_Freedom says:

              Credit isn’t money.

              At that time, goods given on credit were eventually finalized by receiving other goods, i.e. barter.

              There is no difference in principle between a 1 second time period in finalizing a barter trade, or 1 year.

              It’s funny watching you MMTers “randomly” attaching to any theory that seems to falsify Austrian theory. In this case it’s Graeber’s theory.

            • Tel says:

              What for? I am much more interested in what happened before, when money originated as credit.

              So you want to go back to Roman times where they used gold coins for high value transactions, and salt for low value transactions?

              Or back to the Greek trade where tin and copper ingots were popular tokens of exchange, but they also traded in gold. Have a look at the following:


              Note the wire is set into a spiral shape, this design was common because it allowed the owner to quickly unroll a part of the spiral and cut off a length to buy something.

              This example is three and a half thousand years ago, but the general idea of a gold wire spiral than can easily be cut as needed, turns up all over the place.

              If you really like, why not go right back to the prehistoric flint trade? Now that’s about ten thousand years ago.

  10. David S. says:

    You have to be truly ignorant to miss Krugman’s point about the Euro as a modern gold standard. It’s a fixed exchange system. That’s what matters. In the Depression, the gold standard was a huge problem in Europe. Now it’s the Euro.

    • skylien says:

      How it is not fixed within the US? E.g. can California devalue “its” currency relatively to the rest of the US?

      • MamMoTh says:

        The US is an optimal currency zone. More importantly, there is a federal fiscal authority that can resolve imbalances between states.

        • skylien says:

          To be in an OCA (optimal currency area) doesn’t change that for them it is like a “nouveau gold-standard regime”. Important is: Would they definitely get a bail out? California was already on the verge of default and issued IOUs. It didn’t receive a bail out, although they begged for one. For NYC it was the same in 1970. Did not receive a bail out as well, though they begged for one too. So it clearly seems for them it feels like a rigid gold-standard. Harrisburg and Rhode Island already filed for bankruptcy too this year.

          So would they all get endless bail outs no matter how much debt they have if push really comes to shove? If not they would default and also are not in a position to pursue deficit spending to bring unemployment down and jump-start the economy. Yet how can they even try to deliberately engage in deficit spending if they are not even sure if they get bailed out ever? If you answer that it’s only the federal government’s role to do deficit spending and “creating” jobs, then it would only mean again that for California and the rest it is like a “nouveau gold-standard regime”. If you answer they should be able to do that, then they need a guarantee of bail outs. It seems they don’t have that, so until now it really looks like they all are trapped in a fixed exchange standard like Greece.

          • MamMoTh says:

            Sure, US states find themselves in the same position as EZ countries.

            But, unlike EZ countries, the US Federal government transfers money to the states, and is responsible for much of the spending within the states.

            Also, the US is fine with having empty states.

            • skylien says:

              “Sure, US states find themselves in the same position as EZ countries.”

              Yes thats what I am saying. There is a difference in denouncing totally a “nouveau gold standard regime “or only under certain circumstances, since it exists within the US as well.

              What confuses me is North Dakota. They have their own central bank, the BND. I really don’t understand yet how this one operates within the FED system. It somehow can print money, but which money, special north dakota Dollars ? And why don’t all states especially the ones in trouble set up such a CB too? Does the FED prohibit this now?

              • MamMoTh says:

                It’s just a bank, although a state owned one, which has an account at the Fed as any other bank.

                It does not issue its own currency which is prohibited as far as I know, although the are a few local currencies around tied to the USD.

              • Joseph Fetz says:

                I am afraid that MamMoTh has you on this one, skylien. There is really no difference between the Bank of North Dakota and any other bank other than it is owned by the state government and holds all of the state’s accounts.

                In fact, I personally find that dynamic more troublesome than redeeming (state-owned banking).

              • skylien says:

                Ok. So it is less special than I thought.


              • Joseph Fetz says:

                No biggy. About a year ago when a lot of people were talking about the BND I decided to call them up to ask a few questions. Once I got further into the different banking regulations of the FRA the guy on the other end of the line asked me if this had anything to do with the Fed.

                I explained to him that many people were saying “this” or “that” about the BNK. He told me basically what I said above, that the BND is just like any other bank in the FRS, the only difference being that it is state-owned and holds all of the state’s accounts. I am sure that it is probably a little more complex than that, but that’s the basic idea.

              • skylien says:

                Yes right, there were all sorts of people saying: See North Dakota is so great because they have their own CB where they can print money whatever they need, unlike the privately owned FED where the government has to borrow etc… It was mostly followers of Gesell’s Freigeld theory and tally sticks. I only thought this to be quite strange, because no one did go into any operational details of the BND…

                Just to be sure the thanks was for both of you also MamMoTh. I try to learn and appreciate answers/help from all sides.

  11. Cody S says:

    Back to the Euro == Gold Standard discussion,

    The individual EZ countries face dealing with the Euro as though it were a gold standard, because they are not the sovereign issuers of the Euro and therefore have to deal with debt problems without being able to create money for that purpose. So, it is as though their money is tied to a commodity price which they cannot control, and they have to come up with more of that commodity before they can pay down debt.


    • David S. says:

      That’s right. And sovereign debt investors often prefer some inflation to austerity, because at least the former improves the economic outlook, while the latter worsens it, vis-a-vis an issuer, possibly leading to more default risk later.

  12. Cody S says:

    Oops. Let that sit on the desktop for several hours and then posted by accident.