Paul Krugman posted his response to the original MMT piece. If you have some time the comments from the original piece are illuminating and 99:1 against Krugman. Anyhow, in his response he writes:
“A followup on my printing press post: I think one way to clarify my difference with, say, Jamie Galbraith is this: imagine that at some future date, say in 2017, we’re more or less at full employment and have a federal deficit equal to 6 percent of GDP. Does it matter whether the United States can still sell bonds on international markets?
As I understand the MMT position, it is that the only thing we need to consider is whether the deficit creates excess demand to such an extent to be inflationary. The perceived future solvency of the government is not an issue.
I disagree. A 6 percent deficit would, under normal conditions, be very expansionary; but it could be offset with tight monetary policy, so that it need not be inflationary. But if the U.S. government has lost access to the bond market, the Fed can’t pursue a tight-money policy — on the contrary, it has to increase the monetary base fast enough to finance the revenue hole. And so a deficit that would be manageable with capital-market access becomes disastrous without.”
This is a classic retort (and honestly, one I expect from someone just learning MMT). If you skip the logical sequence of events in any economic reality you can discredit anything. What Professor Krugman fails to address is why the USA will lose “access to the bond market”. This is a crucial step in the progression here. Why will savers suddenly lose their desire to save in $USD? Why will the Primary Dealers stop purchasing the bonds? Why will the buyers strike?
If it is due to high inflation then it is safe to say that the US economy has either rebounded sharply (in which case the buyers strike argument is bunk to begin with) or output has utterly collapsed (in which case you need to elaborate on the reasons why there is going to be some collapse in US economic output). If his 2017 scenario involves a much stronger economy and something resembling full employment then a 6% budget deficit would be inappropriate and as previously stated, would not be recommended by any MMTer. Interestingly, the budget deficit could fall to 6% in an environment in which the government begins a form of austerity measures, but as Professor Krugman has often said, this will likely lead to a Japan scenario and a more deflationary outcome (in which case the collapse of the US government bond market is nonsensical). He doesn’t explain the sequence of events so we have no way of knowing (I believe he has intentionally left out the details because his scenario is not realistic).
Either way, we appear to be making a one way argument down the nonsensical hyperinflation route which requires a great deal more analysis and explanation than just “the USA will lose access to the bond market”. Professor Krugman does no such thing, so while his comments may appear valid at first glance, they are in fact highly misleading.
None of this even touches on the operational realities that MMT discusses (the fact that bond markets fund nothing in the USA – a fact that Professor Krugman clearly doesn’t even begin to understand), but the sequence of events is important nonetheless. If you skip this crucial step you are merely creating a strawman argument and Professor Krugman is using his heavyweight stature in the field of economics to blow right thru that strawman with the assumption that his opinion is enough to validate the argument in the first place.
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.
"