Tuesday, May 28, 2013

Ralph Musgrave — Carmen Reinhart is clueless on fiat

In this letter to Paul Krugman, Reinhart asks, “What is the foundation for your certainty that as peacetime debt hits new records in coming years, the United States will be able to engage in forceful countercyclical fiscal policy if hit by a large unexpected shock?” (Letter to Krugman)

What Reinhart clearly doesn’t understand is that “debt” is completely irrelevant: that is, a monetarily sovereign country, regardless of what amount of national debt it happens to have, always has the option of simply printing money and spending it (and/or cutting taxes) – as pointed out by Keynes and Milton Friedman.

As to “unexpected shocks”, Reinhart is not clear on what those might be. But in the paragraphs just prior to the above quote she rambles on (as you’d expect) about what happens when foreign creditors cease wanting to buy or hold a country’s debt.

Well to repeat, if the US government finds that no one wants to lend it dollars, it can just print them! Doh! As long as it doesn't print so many as to cause excess inflation, the US government do whatever amount of "countercyclical fiscal policy" it wants.

Ralph Musgrave
Carmen Reinhart is clueless on fiat


Roger Erickson said...

How did it come to this?

No kid should get past 5th grade without adequate orientation to their environment.

Tom Hickey said...

There are only two constraints for a currency sovereign, domestic price inflation and currency devaluation. Governments can always control inflation that is induced by excessive aggregate demand by withdrawing spending power from the economy through fiscal policy. Emerging countries that are dependent on the external sector have to watch the value of their currencies but developed economies are helped by devaluation since this improves their export position. If the USD were to be significantly devalued, most of the rest of the world would have to abandon free trade and erect trade barriers against an onslaught of US exports, which the US could interpret as sufficient grounds for reprisal, "with all options on the table."

Roger Erickson said...

So the present situation just shows that the large-scale merchants are in charge of tax and fiscal policy?

Our lobby process is unbalanced?

Meaning we've lost our democracy?