Warren Mosler offers a good analysis of Paul Krugman's article "Debt is Good." I try to avoid writing "Paul Krugman does not get it" articles, as that is already a crowded field. However, since the article caught a lot of attention, and is right up my alley, I feel I should comment on it.
One could summarise Mosler's article as that Krugman is directionally correct, but he is still not thinking about things properly. His idea (which he attributes to Ricardo Caballero of M.I.T.) that government debt is "good" because it provides a "safe asset" to investors is hardly novel. It was discussed in depth decades ago by Hyman Minsky, and probably many other economists that I am less familiar with. This offended some fiscal conservatives, but this is because many of them refuse to accept that a central government liability is an asset to the non-central government sector. (We could say "private sector," but that may seem like a strange label for entities like the Chinese reserve managers. It is actually reasonable, since those Chinese reserves are being accumulated to advance Chinese business interests.) Although they want to reduce government debt, they do not offer any mechanism to reduce private sector financial assets.
In Understanding Government Finance, one of the key themes is the central role of central government liabilities for liquidity management. The only way to avoid the use of government bonds in liquidity management is to create bank reserves, which are just a form of government liabilities that have particular restrictions on which entities can (and must) hold them. Although I am allergic to the term, reserves are a form of "financial repression" on the banking system.….Bond Economics
Mosler On Krugman On Debt
Brian Romanchuk
