26 Nov 2012

Krugman’s Conversion to the MMT Side Is (Almost) Complete

Debt, Economics, Krugman, MMT 11 Comments

Krugman yesterday:

There’s an interesting mix of contrast and similarity between the policy debates in Britain and the United States right now. In both countries — as in every country that retains its own currency and has debts denominated in that national currency — interest rates are near record lows…

It’s very hard to come up with any reason why either the US or the UK might default, since they can simply print money if they need cash. And given the absence of real default risk, long-term interest rates should be more or less equal to an average of expected future short-term rates (not exactly, because of maturity risk, but that’s a fairly minor detail).

So if you expect the US and UK economies to be depressed for a long time, with the central bank keeping rates low, long rates will be low too — end of story.

But won’t that money printing cause inflation? Not as long as the economy remains depressed.

I vaguely recalled a debt and inflation crisis in Great Britain from the 1970s, so I googled to get the details. Try this summary from the UK national archives:

Sterling devalued and the IMF loan
Devaluation of the pound

The left wing of the Labour Party defeated the Public Expenditure White Paper in the Commons in March 1976. Subsequently, Harold Wilson resigned and James Callaghan took over as Prime Minister. Around this time, investors became convinced that the pound was overvalued and that the government might devalue. A large-scale sale of sterling began, which rapidly lost value against the dollar.

In spite of further efforts to reduce inflation, the pound continued to lose value, reaching a record low against the dollar in June 1976….

The 3.9 billion dollar loan

As pressure on the pound continued, the government approached the IMF for a loan of $3.9 billion in September 1976. This was the largest amount ever requested of the Fund, which needed to seek additional funds from the US and Germany. The IMF negotiators demanded heavy cuts in public expenditure and the budget deficit as a precondition for the loan. Healey’s proposals for a cut of around 20 per cent in the budget deficit were hotly debated in Cabinet, particularly by Anthony Crosland and Michael Foot. Eventually they acceded, as it seemed likely that the refusal of the loan would be followed by a disastrous run on the pound. Healey announced the forthcoming reductions in public expenditure to the House of Commons on 15 December 1976.

Following the agreement with the IMF, the overall economic and financial picture improved. Interest rates were soon reduced and the pound quickly appreciated in value. By the end of 1977, partly as a result of new oil revenues, there were improvements in the balance of trade. Britain did not need to draw the full loan from the IMF. Nevertheless, the IMF crisis reinforced a change in policy orientation away from full employment and social welfare towards the control of inflation and expenditure.

I know, I know: The only reason anything bad happened, was that the people in the UK government, the US government, and the IMF were all nuts. Had they just let the pound continue to sink, everything would have been fine. Krugman’s medicine just needed a larger dose and more time to prove its efficacy.

Also, in the 1970s there was disco fever. That isn’t the case today. Clearly the British experience in 1976 has no relevance for our current crisis. Only those ignorant of basic economics and world history could possibly think huge debts pose a problem for a government with a printing press.

11 Responses to “Krugman’s Conversion to the MMT Side Is (Almost) Complete”

  1. Major_Freedom says:

    But won’t that money printing cause inflation? Not as long as the economy remains depressed.

    Murphy, isn’t this comment consistent with “the structure is the problem” Austrian theory? If all this money printing doesn’t do what it otherwise would have done in the past (lead to high inflation), what other explanation is there? Why aren’t people spending all this printed money in the existing structure, unless there is a problem with the existing structure?

    • Tel says:

      A number of reasons: there is still debt deflation going on in the USA, even after four years. This has been drawn out in time because policy makers didn’t want the sudden deleveraging (and I can understand why, because it is painful) so in the housing market you still have huge numbers of marginal mortgages, and houses that are on the books way above their real value, or houses sitting empty that just can’t be sold.

      Mark to market accounting was “temporarily” halted in 2008 and it is looking a lot like the way income tax was “temporarily” introduced just to fight the war.

      The freshly printed money is mostly going to banks, and they are using it to sit on excess reserves and patch up the holes in their books. At the retail level, people just don’t have any confidence to spend, and they mostly don’t have anything to spend with. In other words, there’s a lot of money sitting out there, but velocity is basically zero.

      • anon says:

        Consumption is actually high by historic standards so I wouldn’t say confidence is low.

        • Tel says:


          There’s a few index graphs. Consumer durables are down from what they were in 2003 — 2006 and don’t show any signs of recovery. Consumer non-durables took a nose dive in 2009 but have partly recovered, not looking like a full recovery there. The “new car” index is also generally down.

          It is difficult to adjust for inflation in retail figures, so various people come up with different answers.

          Many people say that the USA consumes too much, so this correction is possibly a good thing. If you mean older historical standards (going back to the 50’s and 60’s etc) but at least in recent times most retail industry reports are looking pretty glum. Could be a bit of a boost this Christmas, I guess we will see how consumers react to the new Obama presidency.

          • anon says:

            Tel, I don’t know why you’d expect consumption (as a share of income) to return to bubble levels in a depressed economy.

            Dean Baker says historically the savings rate has been about 8 percent, during the bubble it went to zero, and now it’s around 5 percent. We shouldn’t expect it to go back to zero unless we want another bubble.

            • Tel says:

              From that perspective I see what you are getting at, but there’s some restructuring required to get back to a consumption/savings balance that has not been common in the USA for many decades. No one enjoys being the victim of restructuring (i.e. losing job, searching for a new one, etc).

              Also, the prevailing Keynesian wisdom is that high consumption is necessary (even though simultaneously the USA is lambasted for having such high consumption) so I guess people have to re-learn a bit. Lifestyle adjustment, etc.

              I might further point out that what most households are doing is just paying down their existing debt. You might call that “saving” but point is that ideally “saving” means producing more than you consume and passing the surplus to invest in FUTURE consumption. However paying down the debt is catching up on PAST consumption. As I said above, there’s a lot of necessary deleveraging to do.

        • Tel says:


          These guys use oil consumption and electricity consumption as indicators, both of which show a recent downward trend. The oil consumption graph has a “double-dip” kind of shape to it.

          Mind you, oil and electricity consumption could be consumers… or could equally be producers, or maybe efficiency gains. Hard to know.

      • Major_Freedom says:

        Why is there deflation despite Ben’s CTRL+P binge?

        Why is there no confidence?

  2. Bob Roddis says:

    Haven’t we had inflation over the past half decade? 8% using 2007 (as opposed to 1971) as the base year?

    What cost $100 in 2007 would cost $108.09 in 2011.
    Also, if you were to buy exactly the same products in 2011 and 2007,
    they would cost you $100 and $92.61 respectively.

    Do you want to do another calculation?


    All during a period when housing prices collapsed and lots of people were engaging in “deleveraging”.

    See. Austerity and tight money just don’t work.

  3. anon says:

    Bob, do you have any more information about this? The first search I did says Britain’s inflation peaked in 1975. If inflation peaks in the double digits in 2013, what do you think Krugman will propose in 2014?

    Also, I believe all of the major countries faced a stagflation crises from the oil shock. Are we facing an oil shock now? Or will we in 2013?

    It’s unclear how this is evidence against devaluation either. The devaluation began supposedly because the market thought Britain wanted devaluation. So Britain apparently got what it wanted and used the IMF program to stop *further* depreciation. Supposedly by 1977 they were trying to stop re-appreciation. This sounds like a kind of Keynesian cyclical policy to me.

  4. Lord Keynes says:

    “had they just let the pound continue to sink, everything would have been fine.”

    Except that’s a ridiculous caricature. The concern at that time was an overvalued pound hurting the UK’s exports, and it was a real problem: they had currency appreciation after oil discoveries, and suffered the so-called “Dutch disease.”

    I vaguely recalled a debt and inflation crisis in Great Britain from the 1970s,

    While the devaluation no doubt contributed to inflation, the main inflation crisis of the 1970s had quite different causes:


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