10 Oct 2013

Krugman on America Becoming Greece: “Show Me the Model!”

Krugman 1 Comment

Professor Paul Krugman, scientist, has patiently been showing with his formal analysis that it’s literally impossible for a country with most of its debt denominated in its own fiat currency, to have a Greece-like catastrophe, at least while it’s stuck in a liquidity trap. If anything, a loss of investor confidence would help such an economy. Indeed, Professor Krugman has become so exasperated that in his latest post on the topic, in which he can’t believe that Ken Rogoff still isn’t seeing the point, Krugman says this:

Just to come back to my original point: I find it quite remarkable that nobody has managed to produce a coherent model to justify the seemingly simple story that anyone, even a country that borrows in its own currency, can suddenly turn into Greece. Again, show me the model!

In that context, someone should send Krugman this video (HT2 Niall Ferguson):

One Response to “Krugman on America Becoming Greece: “Show Me the Model!””

  1. Nick says:

    What is misunderstood is how much of governments debts are linked to inflation. Primarily pensions are inflation linked debts, paid for up front.

    If we take the UK, official debt, 1.2 tr GBP. True debt, pensions etc included 8.0 tr. Almost all the debts are inflation linked. You cannot print your way out of inflation linked debt. As fast as you print to pay, the debt escalates. Basically the state has offered purchasing power as the payout in return for contributions. It cannot get enough purchasing power, so it ends up defaulting on those promises, and that is dire for those who have been forced to rely on the state of their old age.

    Greece is also an interesting case, particularly for the gold bugs. Here is a country that is in a mess with debt, but can’t print because it doesn’t have a printing press. Gold as a currency wouldn’t help Greece one iota, because it can’t print gold, and it can’t print Euros. Gold bugs miss the point. It is government’s borrowing that is the problem. Choosing any currency isn’t a solution to that problem.

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