11 Nov 2011

Krugman Promises to Reconcile Himself at a Date TBD

Economics, Krugman, MMT 78 Comments

Ah, I’m glad to see some people are apparently busting Krugman in the comments of his blog about an apparent inconsistent (dare I say Kontradiction?). For a while Krugman has been ripping on the people worrying about deficits, by pointing to other countries that have higher debt-to-GDP ratios than the US does. Here’s a good one from November 2009. Krugman posts a chart showing US debt surpassing that of Belgium but still well below Italy and Japan. Krugman then says:

Why, people ask, would I want to compare us to Belgium and Italy? Both countries are a mess!

Um, guys, that’s the point. Belgium is politically weak because of the linguistic divide; Italy is politically weak because it’s Italy. If these countries can run up debts of more than 100 percent of GDP without being destroyed by bond vigilantes, so can we.

So you see the problem now, with Krugman having made arguments like that for more than a year. (I’d love it if he used Greece as an example, but I don’t think he did, since it’s a pretty dinky country and I doubt they would have even been on people’s radars until, well, the bond vigilantes decided to attack. You know, the invisible ones.)

Today Krugman acknowledged this apparent problem and handled it this way:

A quick note right now, maybe more later.

One question that keeps coming up is, how can I reconcile my scorn for warnings about bond vigilantes with what is happening to Italy? This seems especially pointed because I have in the past used Italy’s ability to carry debt exceeding its GDP as an illustration that debt concerns were overblown.

The answer lies in the concept of original sin. Not the Pope’s kind, but the economics kind — the long-standing notion that developing countries were especially vulnerable to financial crises because they borrowed in foreign currency. (Yes, the linked paper actually raises some distinctions between currency mismatch and original sin; never mind for now).

The key point is that by joining the euro, Italy took a bite of the apple — it converted its advanced-country status, as a nation issuing debt in its own currency, into original sin, with debts in someone else’s currency (Europe’s in principle, Germany’s in practice). That is the root of its new vulnerability.

More on all this later, I hope.

Yes, I hope so too.

The problem is, this wasn’t “the key point” when Krugman was ripping on the austerians back in 2009, and he routinely cited Italy as an example of a country with a high debt-to-GDP ratio.

The US government will be the last domino to fall in (what I perceive to be) a global bubble in sovereign debt. So as these dominoes keep toppling, of course Krugman and my MMT friends in the comments will always come up with some reason that the latest victim of the bond vigilantes is the last one–it could never happen here.

And then, when it does happen here, the fault won’t be with the massive run-up in debt championed by Krugman et al. in the interim. No, it will be because the Fed doesn’t have the courage to inflate enough, or because investors get spooked by fiscal conservatives in Congress, or because of some yet-to-be-determined difference that excuses the humongous deficits that made the government vulnerable to the bond vigilantes.

(Remember, Iceland didn’t adopt the euro. As I recall, the bond vigilantes had a few words with them. I know, I know, they had debts denominated in other currencies. There’s always a way to explain it away. Fiat money and massive deficit spending aren’t the problem; we haven’t really given them a chance yet.)

78 Responses to “Krugman Promises to Reconcile Himself at a Date TBD”

  1. Bob Murphy says:

    Daniel, when I ripped on Peter Schiff in early 2007 and predicted the US economy was fine, that was a mistake. Period. I should not have said that. If one of my defenders later on said, “Are you kidding me? You’re telling me Bob Murphy, the guy who had read Human Action in high school, didn’t realize the implications of ABCT in January 2007? I don’t buy it”–then I would tell my defender thanks, but yeah I was wrong on that one.

    Krugman openly said in the quote I provided that the case of Italy proved that you could have a high debt-to-GDP ratio and not get blown up by bond vigilantes. That was a dumb thing for him to say. Italy was in fact quite vulnerable to bond vigilantes.

    The people who are warning “we could be like Greece if we don’t get our act together!!” obviously aren’t saying, “Right now we are under attack by the bond vigilantes!!” They have windows, they can look out of them.

    No, the people are saying we better get our situation under control because things can move very quickly and unravel. A slight change in expectations and we could get a self-fulfilling prophecy.

    So, the fact that Italy can go from being a Krugman talking point on “why high debt to GDP ratios are fine” into “I told you morons that a pseudo gold standard would wreck Italy” is problematic.

    I’m actually going to do a quick post about this, Daniel.

    • MamMoTh says:

      Krugman openly said in the quote I provided that the case of Italy proved that you could have a high debt-to-GDP ratio and not get blown up by bond vigilantes. That was a dumb thing for him to say. Italy was in fact quite vulnerable to bond vigilantes.

      I think you are right. MMTers pointed out his mistake at the time. Apparently he is now realizing what it really means to be monetarily sovereign.

    • Joseph Fetz says:

      That’s what I love about you, Bob. You’re never afraid to admit when you’re wrong. Some here would call you names or insult your intelligence, yet not a single one of them ever admits their errors, and worse, they have many errors. Nobody can ever say that you don’t have integrity.

  2. AP Lerner says:

    “And then, when it does happen here”

    How long am I allowed to hold on to this post, and then respost it in the comments to prove a Murphy error in understanding fiat money? 2 years? 5 years? 10 years? A lifetime?

    • Major_Freedom says:

      About the same amount of time as the implied maturities of all your predictions.

      Wait, what’s nothing plus nothing plus nothing multiplied by nothing?

      • AP Lerner says:

        I, and other MMT’ers have consistantly said over the last few years that rates would remain low, and fall. I said this at 4%, 3.5%, 3%, 2.5% and so on. Don’t believe me? Ask Bob Roddis. He has been stalking me for about 2 years now. What have Austrians said about rates? Check out this nonsense from June 29 2010


        I’m the first commentor. Look, everyone can be wrong. So what, it happens. What’s really sad about this post, and Austrians views on rates, inflations, the USD etc is not only have they been completely wrong, their reason is just out of left field. The post above, case in point. Austrian economists should be embarrassed by Prof. Anderson and Guido Hulsmanns response to me.

        • Major_Freedom says:

          I, and other MMT’ers have consistantly said over the last few years that rates would remain low, and fall. I said this at 4%, 3.5%, 3%, 2.5% and so on. Don’t believe me?

          I’ll totally believe you….as soon as you show me predictions YOU PERSONALLY have made

        • Dan says:

          They should be embarrassed? This coming from the guy who said monetizing the debt would be deflationary in the first response to Guido. APL, would you please do us a favor and spell out what would have to happen in the economy to make you say you are wrong. Dr. Murphy has done so and apparently DK has as well. You like to spout off about how only the MMTers understand how the monetary system works and the rest of us are a bunch of flat eathers but you never put your balls on the line and spell out what would prove you wrong. If you’re not willing to do this then could you please stop claiming we are wrong on our predictions about inflation and interest rates when we consider it to still be early in the game. You already have a post from Dr. Murphy that spells out what would make us wrong and so we aren’t claiming our predictions are not falsifiable. So either sack up or shut up.

    • Dan says:

      Dr. Murphy spelled out exactly what would make him wrong in a post not that long ago. I don’t have time to dig it up but it is on this site. I would love to see the MMTers or keysians do the same.

      • skylien says:

        You won’t hear that from Daniel. He has actually blown me away when he stated that he doesn’t think you can falsify (empirically) Keynesian theory (as well as other “truly interesting” theories incl. Austrianism).


        When I think of how many attack and ridicule Austrians for that statement…

        • Daniel Kuehn says:

          Not falsifiable in a Popperian sense, that is. Don’t twist my words into me saying that these theories are impervious to evidence, please.

          I have recently spelled out what would make me change my mind on Keynesianism at Russ Roberts request, so if you think “you won’t hear that from Daniel” you’re dead wrong.

          What you won’t hear from Daniel is a Popperian account of the progress of science.

          • Dan says:

            Can you post a link to that? I know exactly what would get me to disregard Austrian theory and I’d be curious to see what would do the same for you towards Keynesianism.

          • skylien says:

            It was for sure not my intention of to misinterpret you. I thought I paraphrase you correctly. Therefore I also provided the link.

            Anyway this confuses me now. So you are saying Keynesianism only cannot be falsified in the Popperian sense. Whereas Popper only asked for the theoretical possibility of empirical disprove by experiment or facts.

            Now if you cannot even do this theoretically how would you do it in practice? Could help me out on this?

            • skylien says:

              Can maybe someone else explain what seems to me to be a contradiction?

              How can something not be empirically falsifiable in the Popperian sense but in another?

              I really want to get this right.

          • Bob Murphy says:

            DK wrote:

            What you won’t hear from Daniel is a Popperian account of the progress of science.

            Daniel, I say this because I care, and because you’re young enough still that maybe it will make a difference: I don’t think you want to start talking about yourself in the third person like Charles Barkley or something.

      • AP Lerner says:

        Sorry, but Warren Mosler and Randall Wray wrote books in the 90’s spelling out what the next decade was going to look out. They didn’t bat 1000%, but they sure came close. Start here:


        Sorry, but while Austrians are jumping up and down screaming about their lack of understanding of monetary economics, the MMT’ers were making money of their understanding monetary economics. At the end of the day, there really is no comparing the track record of the MMT’ers to the Austrians. None.

        • Dan says:

          I’m sorry but do you think Austrians have been losing money over the last decade? I’ll take your Mosler and Randall and raise you Jim Rogers and Marc Faber.

        • marris says:

          Lots of people predicted a Euro crisis. Friedman included. Not very useful for making money unless you have the timing down. Exactly what “MMT strategy” has made money? What did Mosler go long and/or short on?

  3. MamMoTh says:

    And an interesting article on the effects of the introduction of the Euro on interest rates:


  4. John Becker says:

    I’m pretty sure the US, Britain, Japan can just electronically credit the accounts of bondholders. Then the Bureau of Engraving or whatever the moneyfactory is called can just keep enough notes in circulation to back up all the electronic data money. Italians, Greeks, Spaniards, or even Germans for that matter can’t do that. We should all be able to get along here.

    • David S. says:

      Bob and his ilk can’t understand simple implications of that fact.

      • Dan says:

        Yeah we completely missed the fact that the US, Beitain, and Japan can create unlimited amounts of currency. I learned a lot today, I can’t believe I totally missed this ability possessed by the Fed. Thankfully there are no consequences to this.

        • MamMoTh says:

          Of course there are consequences: those countries cannot have a sovereign debt crisis (unless they want to).

          • Dan says:

            I know, it is such a sweet deal. We can print as much money as we want without consequence. The only way we run into a problem is if we are stingy and don’t print enough to stave off a debt crises. Heck, if the Fed were not so stingy right now they would make everyone a billionaire tommorow. Think of the consequence free prosperity from that kind of plan.

            • MamMoTh says:

              I repeat, it has a consequence: you do no have a sovereign debt crisis unless you want to.

              Just by swapping one asset with another.

              • Major_Freedom says:

                I repeat, it has a consequence: you do no have a sovereign debt crisis unless you want to

                Except if the only alternative available is print more and destroy the currency, or default and save the currency. Then the government has to choose default, because without a currency, we’d lose the context of government’s fiscal and monetary policy as a matter of debate.

                Just by swapping one asset with another.

                You mean the Fed buys securities with newly created money, i.e. inflation.

              • MamMoTh says:

                No, I mean just shifting NFAs from one account at the central bank to another.

              • Major_Freedom says:

                But the ownership of the NFA is different, and the creation of new money is different.

              • MamMoTh says:

                ownership does not change, only the type of account

              • Major_Freedom says:

                No, when the Fed buys securities with newly created money, the ownership changes from the seller, to the Fed.

              • MamMoTh says:

                The NFAs belong to the private sector.

  5. John Becker says:

    I just wanna say that I’m a through and through Austrian but I just think the MMTers have a point that with the ability to issue currency, you can’t go broke. If you can’t issue currency like countries on the gold standard or under the Euro, you can go broke. That said, I’d rather have the US on the gold standard or on a system of freely competing currencies. I think the discipline imposed by the Euro or gold standard is one of its finest qualities. The countries like Italy are going to have to get more free market very quickly to stay in the currency union. I hope they do that instead of going down the inflationary route.

    • Dan says:

      Nobody argues this fact with the MMTers. We all get that the Fed can always monetize the debt. What we as Austrians fear is the disastrous inflation this would result in. I would challenge you to find one person on this site that doesn’t understand that the Fed can always prevent the government from going broke in nominal terms. Otherwise I don’t see why we should give the MMTers props on knowledge that existed before their theory was even around.

      • MamMoTh says:

        Austrians fear is the disastrous inflation this would result in.

        Try some sort of therapy.

        All phobias can be overcome.

        • Dan says:

          OK, Mammoth we all get that you think the Fed can print as much money as they want without causing inflation. The only thing I don’t get is your hostility, arrogance, and insulting attitude. I try my best not to attack people personally and only go as far as sarcasm when I post something. I dont always succeed and people like you make this very hard to do. So why is it exactly that you feel the need to compete with David S to become the biggest prick that comes to this site?

      • John Becker says:

        I’m an Austrian, I understand the disasters of inflation and the way it spurs the boom-bust cycle. The reason I posted that is that Bob is saying that the US government could have trouble financing itself the way italy and Greece are. Since the Fed has the ability to monetize debt, bond investors aren’t concerned with an inability to pay the way they are with Italy and Greece. Hence, interest rates on treasuries could stay low here even if debt becomes twice the size of GDP. This is exactly what happened in Japan. Further, there is not much evidence in the bond markets that people are concerned about inflation. Borrowing costs are likely to stay low for the US just like they did for Japan in contrast to what is happening to Greece and Italy.

        • marris says:

          > Since the Fed has the ability to monetize debt, bond investors aren’t concerned with an inability to pay the way they are with Italy and Greece. Hence, interest rates on treasuries could stay low here even if debt becomes twice the size of GDP.

          Maybe. I think there are some problems with this. First, most investors don’t seem to prepare for _any_ sovereign credit crisis. That’s why it’s a “crisis,” and not just a smooth rampup in yields.

          Further, it is important to stay out of the MMT trap which _equates_ bonds with cash. Bonds are not cash. They are promises to pay cash in the _future_. So the price of the bond will be very sensitive to what people think the value of spot money will be on the future pay date. If everyone believed that the US was going to pay its obligations [bonds, entitlements, etc] by printing, then people would expect the quantity of money to increase over time, the value of each money unit to fall over time, and market interest rates to rise with time. And government bond yields will reflect this. Bond prices will fall. Bond traders call this possible cause of falling bond prices “interest rate risk,” rather than “credit risk.”

          Finally, it is important not to confuse what is _possible_ with what should be _anticipated_. MMTers could respond that bond prices _need not_ fall. The Fed could establish a _price floor_ for bonds. It could do this by just setting a bid at the floor price. Let’s call this scenario A. Scenario B may be _not_ doing this.

          I agree that the Fed could _attempt_ Scenario A. But as long as the Fed pursues this scenario, it needs to pump money into private holdings. I think the consequence will be rising prices. Prices will rises due to trades with the new money and AND expectations of future _higher_ money balances. Not it is _possible_ that everyone will accept this rising prices consequence and ask the Fed to continue fixing bond prices.

          HOWEVER, I don’t think this will happen. This rising price environment could easily tip over into an _inflationary recession_ [something which seems to have escaped the space of possibilities of most MMTers and Keynesians]. These are _really bad_. There is unemployment _and_ the value of people’s savings falls. I think these environments lead to Volcker moments, where the Fed feels forced to back down from it’s price fix, thus entering Scenario B.

          Of course, the Fed could just pick Scenario B to begin with, which would lead to lower bond prices much earlier.

    • MamMoTh says:

      I think the discipline imposed by the Euro or gold standard is one of its finest qualities.

      It doesn’t impose discipline. It only inflicts pain.

      • Richard Moss says:

        Try some sort of therapy.

        Pain can be overcome.

        • MamMoTh says:

          Try some sort of therapy.

          Masochism can be overcome.

          • Richard Moss says:

            I see – anyone who overcomes pain is ‘operationally’ a masochist.

            I should have seen that one coming.

      • John Becker says:

        It dishes out pain on bloated, socialist governments. It’s actually merciful because their current sovereign debt problems are better than the collapse of their silly systems further down the road.

  6. Turner says:

    Italy now has problems because they do not control their own currency.

    Krugman was previously pointing to them as an example of a country doing OK with high debt/gdp ratios, despite this fact. I’m also not sure he could have predicted the level of incompetence displayed by the ‘Troika’ and Berlusconi in the 2 years since then

    I see no contradiction.

    Honestly, Rothbardians truly do seem to honour their namesake: if you can’t understand something or find it unpalatable, you have refuted it. (See Rothbard on LVT, FRB, ‘taxation as theft’ and Milton Friedman).

    • Dan says:

      What do you mean Turner? Krugman said in the post the yesterday that the remarkable thing was Italy’s fall took so long. Clearly he knew this was coming all along. He just forgot to write about this knowledge when he was using Italy as an example of why the debt in the US isn’t a problem.

  7. Papi says:

    Fiat currency only influences /how/ a country defaults; printing press or non-payment. I don’t see how it has anything to do with /whether/ a country defaults.