[lbo-talk] Krugman and neo-Chartalism (Was: A liberal geek defense...)

Marv Gandall marvgand at gmail.com
Sat Dec 31 14:59:01 PST 2011

On 2011-12-30, at 8:12 PM, nathan tankus wrote:

> Note that my original quote talked about "Krugman would never admit to
> agreeing with them". You can not be a Chartalist and agree with a
> Chartalist position.

Krugman is not a neo-Chartalist and his support of deficit spending does not make him one. Let's try this once more.

You wrote:

> Krugman would never admit to agreeing with them but his recent
> emphasis on the fact that "advanced" countries that have their own
> currency aren't having the debt crisis euro countries are is pretty
> Chartalist.

I replied:

> Many economists and others across
> the political spectrum have stressed that the crisis is proving
> intractable for the PIIGS because they no longer have the power to
> devalue their own currency. The UK and Japan are more indebted than
> some of them, but they can print as many pounds and yen as they need
> to satisfy investors they won't default on their debt. Krugman is not
> being unorthodox here."

Where Krugman and this broader consensus part company with the neo-Chartalists (or "Modern Monetary Theorists" as they're apt to describe themselves) is that the latter say that governments don't have to borrow and that they can run unlimited fiscal deficits by printing money (more accurately, transferring funds by electronic keystroke) until the economy reaches full capacity. They say the bond markets can be safely ignored. Krugman and other advocates of greater fiscal spending say deficits at some point do matter and that the bond vigilantes can't be ignored.

But let Krugman speak for himself:

Deficits and the Printing Press New York Times MARCH 25, 2011

Right now, deficits don’t matter — a point borne out by all the evidence. But there’s a school of thought — the modern monetary theory people — who say that deficits never matter, as long as you have your own currency.

I wish I could agree with that view — and it’s not a fight I especially want, since the clear and present policy danger is from the deficit peacocks of the right. But for the record, it’s just not right.

The key thing to remember is that current conditions — lots of excess capacity in the economy, and a liquidity trap in which short-term government debt carries a roughly zero interest rate — won’t always prevail. As long as those conditions DO prevail, it doesn’t matter how much the Fed increases the monetary base, and it therefore doesn’t matter how much of the deficit is monetized. But this too shall pass, and when it does, things will be very different.


I could go on, but you get the point: once we’re no longer in a liquidity trap, running large deficits without access to bond markets is a recipe for very high inflation, perhaps even hyperinflation. And no amount of talk about actual financial flows, about who buys what from whom, can make that point disappear: if you’re going to finance deficits by creating monetary base, someone has to be persuaded to hold the additional base.

At this point I have to say that I DON’T EXPECT THIS TO HAPPEN — America is a very long way from losing access to bond markets, and in any case we’re still in liquidity trap territory and likely to stay there for a while. But the idea that deficits can never matter, that our possession of an independent national currency makes the whole issue go away, is something I just don’t understand.

Full http://krugman.blogs.nytimes.com/2011/03/25/deficits-and-the-printing-press-somewhat-wonkish/?pagemode=print

I Would Do Anything For Stimulus, But I Won’t Do That New York Times July 17, 2010

It’s really not relevant to current policy debates, but there’s an issue that’s been nagging at me, so I thought I’d write it up.

Right now, the real policy debate is whether we need fiscal austerity even with the economy deeply depressed. Obviously, I’m very much opposed — my view is that running deficits now is entirely appropriate.

But here’s the thing: there’s a school of thought which says that deficits are never a problem, as long as a country can issue its own currency. The most prominent advocate of this view is probably Jamie Galbraith, but he’s not alone.

Now, Jamie and I are, I think, in complete agreement about what we should be doing now. So we’re talking theory, not practice. But I can’t go along with his view that so long as U.S. banks are required to accept U.S. government checks — which is to say so long as the Republic exists — then the government can and does spend without borrowing, if it chooses to do so … Insolvency, bankruptcy, or even higher real interest rates are not among the actual risks to this system.


Full: http://krugman.blogs.nytimes.com/2010/07/17/i-would-do-anything-for-stimulus-but-i-wont-do-that-wonkish/#more-10606

Galbraith's response and Krugman's counter to it are here:


The leading spokespersons for the neo-Chartalist/MMT school, besides Galbraith, are Warren Mosler, Randall Wray, and the Australian Bill Mitchell, all of whom have blogs. If I'm not mistaken, Mike Beggs had an interesting exchange with Mitchell which he posted or reported on LBO a while back.

By coincidence, this week's Economist has a useful and balanced summary of the theory in a longer essay about heterodox economics. Here are the relevant excerpts:

"Mr Mosler champions a doctrine on the edge of economics: neo-chartalism, sometimes called “Modern Monetary Theory”. The neo-chartalists believe that because paper currency is a creature of the state, governments enjoy more financial freedom than they recognise. The fiscal authorities are free to spend whatever is required to revive their economies and restore employment. They can spend without first collecting taxes; they can borrow without fear of default. Budget-makers need not cower before the bond-market vigilantes. In fact, they need not bother with bond markets at all…

"...blogs are not the only way to promote unorthodox ideas. To help spread the neo-chartalist gospel, Mr Mosler ran as an independent “Tea-Party Democrat” in the 2010 Senate race in Connecticut, his home state. His belief that America is “grossly overtaxed” is one that common-or-garden tea-partiers would happily endorse; his belief that fear of national insolvency is a mirage and that there is plenty of scope for borrowing more would have them reaching for their pitchforks—or at least their balanced-budget amendments. His campaign did not meet with electoral success.

"Candidate Mosler’s boast was that he was “right on the money”. A country with its own central bank can generate an unlimited supply of money and guarantee demand for it by requiring it as payment for taxes. That gives the state scope to spend without worrying about going bust, Mr Mosler argues. It can always pay its bills, because it prints the stuff with which bills are paid.

"The policy conclusions neo-chartalism draws from this owe a lot to Abba Lerner, John Maynard Keynes’s “militant prophet”. Lerner believed governments should judge their fiscal policy by its economic results—its impact on jobs and inflation—and ignore any red ink it might spill. Governments should seek high employment and stable prices, much as the Fed does today. But instead of relying on monetary policy to meet these objectives, they should use fiscal policy instead. If private spending is too strong, pushing up prices and threatening inflation, the government should raise taxes or cut its own spending. If, on the other hand, private spending is too weak, jeopardising jobs, the government should cut taxes or increase its own spending.

"So far, so Keynesian. But most Keynesians, anxious to appear fiscally responsible, say that budget deficits in bad times should be offset by surpluses in good times, keeping the level of debt seemly. Lerner admitted this might not be possible. Private spending might be chronically weak. If so, the government should run chronic deficits, adding continuously to the national debt. Lerner did not see that as much of a problem, though he recognised that many others were “easily frightened by fairy tales of terrible consequences”.

"One reason for this extraordinary tolerance towards red ink is straightforward macroeconomics. If firms, households and the rest of the non-government sector collectively refuse to spend all that they earn, they must lend the remainder to someone else. They cannot collectively lend more to each other than they borrow. So they must lend to the government instead. Private underspending creates both a need for fiscal stimulus and a simultaneous demand for the government liabilities a stimulus entails. Eventually, Lerner argued, the public would accumulate so much of this government paper that it would feel wealthy enough to spend again, sparing the government the need for further stimulus.

"What if the public refused to spend, but also spurned government bonds, for fear perhaps of default? That cannot happen, according to the neo-chartalists, because the government can print the money these securities promise to pay. Such a response summons hyperinflationary nightmares of the Weimar Republic, or Zimbabwe. But neo-chartalists would argue that those regimes resorted to the printing press as a way to grab more resources than the private sector was willing to yield. The government and the private sector combined wanted to buy more than the economy could produce.

"In Lerner’s scheme, printing money serves a different role. It gives the private sector something to hold, should it not wish to buy things. Printing money is not a way to increase the deficit. It is simply an alternative way to finance a deficit of given size, one big enough to keep employment up, but—crucially—small enough to keep prices flat.

"This insouciance towards debt opens up Mr Mosler’s ideas (which he used to call “soft currency economics”) to all sorts of criticism. But its application has made him a lot of money. He turned a profit of over $50m for his fund and his clients buying Italy’s lira bonds in the early 1990s, when prominent economists flagged the danger of default. In 1996 he earned them over $100m after he pledged to buy more of a certain type of Japanese paper than the government had issued. And his bank made a monthly return on required equity of over 10% in 2011 largely by buying American Treasury bonds, betting against celebrated investors like Bill Gross of Pimco, the world’s largest bond fund, who sold his fund’s Treasuries in early 2011 before recognising his mistake later on.

"In the neo-chartalist view of the world, fiscal policy comes to resemble monetary policy. When the Treasury spends, it adds to the supply of money in circulation. When it taxes, it withdraws money. So for neo-chartalism to work as intended, budget-makers must both tighten policy once demand has been restored and inflation threatens and also be credible in their commitment always to do so. Otherwise self-fulfilling expectations of inflation will take root, as they did in the 1970s. That period of stagflation demonstrated the need to leave macroeconomic stabilisation to forward-looking technocrats—central bankers—thought responsive to economic news and unresponsive to political demands. If you can imagine fiscal policymakers in Congress allowing the economy to be run in such a way, then you too can be a neo-chartalist.

"Clearly the tea-partiers who would not party with Mr Mosler during his Senate bid will have none of this. Ron Paul, the libertarian Texas congressman whose 2008 presidential campaign was one of the foundations of the tea party, and whose 2012 campaign is currently enjoying an enthusiasm few would have predicted, is a balanced-budget zealot, and from his pulpit as chair of a House subcommittee on monetary policy lambasts quantitative easing as “financial malfeasance”; indeed he advocates abolishing the Fed itself…"

Full: http://www.economist.com/node/21542174

Happy New Year, friends!

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