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Sunday, January 15, 2012

Paul Krugman Marginalizes Modern Monetary Theory (MMT)


Paul Krugman Marginalizes MMT



Paul Krugman does a great job of destroying a strawman and revealing his ignorance of MMT in Deficits and the Printing Press (Somewhat Wonkish) as many commentators point out to him. (It's only "wonkish" because Prof. Krugman doesn't get it.)

Cullen Roche responds with a post at Pragmatic Capitalism that sums it up nicely.


The good news is that Krugman mentions Modern Monetary Theory by name on the #1 economics blog on the net, and it is a truism of public relations and marketing that all publicity is good publicity — and it is even better when it is unsolicited and free. Thank you for the shout out, Prof. Krugman.

For the wonks:

The crux of Krugman's hit piece is this: "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."

Prof. Krugman presupposes "no IOR (interest on reserves)." But the Fed is already paying interest on reserves. Why suppose that if there are excess reserves that the Fed would not pay a support rate (IOR) consistent with the interest rate it targets (FFR), especially if no Treasury securities are draining the excess reserves?

As Anon points out in a comment at The Center of the Universe in this thread:

"IOR is not an option – its mandatory – if there are excess reserves and if the Fed runs a positive fed funds target – i.e. if the Fed wants to tighten at some point in the future. And he’s talking about excess reserves as a result of what he calls “monetizing” the deficit.

"That makes the difference between excess reserves and t-bills immaterial in terms of the interest rate and economic effect.

"He [Krugman] doesn’t seem to understand this.

"The failure to differentiate reserves and currency as distinct monetary components is quite foolish. That’s a trap that all economists who don’t understand the monetary system fall into."

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UPDATE: Prof. Scott Fullwiler tweets:


Another for @NYTkrugman & anyone else interested: Do Not Confuse Solvency with Sustainability

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Warren Mosler responds to Krugman 1 here.

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Prof Bill Mitchell responds to Krugman 1 here and here.

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Rob Parteneau responds to Krugman 1 here.

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Marshall Auerback responds to Krugman 1 here

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ses responds to Krugman 1 here with citations.

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William Allen (traditional economist, convert to MMT) responds to Krugman 1 here.

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hbl responds to Krugman 1 here.

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Canadian BD responds to Krugman 1 here.

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Adam responds to Krugman 1 here. (Ouch)

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Andy Harless respondes to Krugman 1 here.

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Charles Jurcich responds to Krugman 1 here and brings in the job guarantee.

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Here Steve Sherman thinks that Krugman may be responding to a post by Dean Baker, Krugman Is Wrong: The United States Could Not End Up Like Greece.

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obsvr-1 responds to Krugman 1 here. (Proposal for reform)

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Letsgetitdone (Joe Firestone) posts on Krugman 1 at DailyKos:


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Prof. Krugman reacts with another post, dragging Prof. James K. Galbraith into the fray and claiming that deficits can lead to federal insolvency.


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Tom Hickey responds to Krugman 2 here.

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JKH responds to Krugman 2 here.

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beowulf responds to Krugman 2 here.

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Prof. James K. Galbraith comments on Krugman 2 here.

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Marshal Auerback responds to Krugman 2 here.

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Andy Harless responds to Krugman 2 here.

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Ron T. responds to Krugman 2 here.

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Tschaff Reisberg responds to Krugman 2 here.

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John K responds to Krugman 2 here.

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rpiert responds to Krugman 2 here.

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Roger Erickson responds to Krugman 2 here.

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Cullen Roche posts at Pragmatic Capitalism on Krugman 2:


CR: "Unfortunately, his argument is the logical equivalent of debating with someone about the potential decline in oxygen levels in the atmosphere and concluding with the absurd statement that “if the oxygen runs out tomorrow we will all die”. Of course this is true, but one must first explain what will lead to the lack of oxygen and the specific sequence of events. If you fail to do so you have failed to prove a point in the first place….Professor Krugman fails to connect the dots in a rational and logical sequence of events and it entirely discredits his conclusions."

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Letsgetitdone (Joe Firestone) posts on Krugman 2 at DailyKos:


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Steve Randy Waldman posts on Krugman 1 and 2 at Interfluidity. (See the comments there, too)


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BTW, I have tried to select a representative cross-section of the best comments and haven't included every relevant comment, so please don't be disappointed if yours doesn't appear. If Prof. Krugman reads only a few of these comments, I don't see how he can continue to hold his basically monetarist position.

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