H/T to the Motor City's own "Detroit Dan" for the link to a write-up by Michael Hudson over at Naked Capitalism.
Hudson takes exception to some parts of Paul Krugman's recent advocacy, but in the process states:
So I am afraid that his book might as well have been subtitled “How the Economy can Borrow its Way Out of Debt.” That is what budget deficits do: they add to the debt overhead.
This blind spot with regard to debt derails Mr. Krugman’s trade theory as well. If Greece leaves the Eurozone and devalues its currency (the drachma), for example, debts denominated in euros or other hard currency will rise proportionally. So Greece cannot leave without repudiating its debts in today’s litigious global economy. Yet Mr. Krugman believes in the old neoclassical nonsense that all that is needed is “devaluation” to lower the cost of domestic labor. Costs can “be brought in line by adjusting exchange rates.” the problem is simply exchange rates. That will reduce labor’s cost and other domestic costs to the point where governments can export enough not only to cover their imports, but to pay their foreign-currency debts (which will soar in depreciated local-currency terms). If this were the case, Germany could have paid its reparations debt by depreciating the mark in 1921. But it did – a billion-fold, and even this did not suffice to pay. Neoclassical trade theorists just don’t get this. [Ed: Is he reading Ramanan's posts?]
How will the government running a larger deficit cope with today’s dimension of the debt problem...
The only variables he admits are structure-free: The federal government can spend more, and interest rates can be lowered (especially on mortgages) so that the higher debt overhead can be afforded more easily. No need to write it down. That extreme a structural solution lies outside the scope of his neoclassical economics.
The problem interfering with the circular flow between producers and consumers (“Say’s Law”) is not “saving” as such. It is debt payment. And without writing down debts, the U.S. economy will shrink just as will those of Greece, Spain, Portugal, Italy, Ireland, Iceland and other countries subjected to the Washington Consensus of neoliberal austerity.
Just when it looked like we had him in the "MMT Corral" after the Remini Conference in February, it looks like Hudson has jumped the fence...