Monday, March 28, 2011

Jamie Galbraith smacks down Paul Krugman

There was a HUGE response by the entire MMT commuity to Paul Krugman's hatchet job that came out on his blog last week. (By the way, take note the very civil tone and all the highly thoughtful and intellectual comments posted all over the web by the MMT community. Compare that to the sick, ignorant and perverted filth that regularly spews from the likes of the Schiff crowd and the gold lunatics.) Please read the response of Jamie Galbraith, who literally embarrasses the Nobel Prize winner and leads him, like a child, in the direction he should be going.

What do you mean, exactly, by the phrase, “solvency of the government”?

According to my dictionary (Webster’s Third New International) an entity is “solvent” when it is “able… to pay all legal debts.”

If you will look in your wallet, you will find, on any Federal Reserve Note: “This Note is Legal Tender for All Debts Public and Private.”

Can we agree that the United States government, of which the Federal Reserve is a part, can always produce the Federal Reserve Notes required to pay its public debts?

It follows, without any possibility of misunderstanding or error, that the United States Government is always going to be solvent.

According to the same source, an entity is “insolvent” when it is unable to pay debts, or has “liabilities in excess of a reasonable market value of assets held.”

If this is what you have in mind, then please explain: what is the “reasonable market value of assets held” by the government of the United States? Go ahead, if you want, and add up all the land, buildings, aircraft carriers and submarines. And then, don’t forget to add the capacity to produce, without limit, pieces of paper of a legal – and therefore market – value of “one dollar” each.

Can this value, which is unlimited, ever be less than the finite value of public debts? No, it cannot.

Conclusion: A government that issues its own currency and owes its debt in that currency cannot be insolvent.

Now, let’s go to your hypothetical future case: full employment and a six percent of GDP deficit. Could this be inflationary? Sure. Could it cause a fall in the nominal exchange rate? Sure. Could the Fed offset this with higher interest rates, raising the rates paid on federal debt? Sure. And would the bonds sell? Of course they would. In an inflation, people don’t hold on to cash.

What can you mean, Paul, by your scenario in which “the US government [cannot] sell bonds on international markets”? All bond markets are international. Does it matter whether the buyers are “foreign” or “domestic”? Of course it doesn’t. It’s just as foolish to worry that foreigners might not buy our bonds, as it is to worry that they own too many of them now.

Can we agree, please, that this disposes of the non-issue of “solvency”? I hope so.

We’re getting over-run by waves of long-run deficit-hysteria and it does not help to complicate the question with this false issue.

Please turn your firepower to the very foolish statement just now by ten former CEA chairs, not-including the admirable Joe Stiglitz. The ex-chairs claim, among other things, that the Bowles-Simpson report “documents that ‘the problem is real, and the solution will be painful.’” In fact, the B-S draft documents nothing at all; it has just one page of assertions and the rest is a laundry list.

Go get ‘em, please.


No comments: