All this talk about inflation, hyper-inflation, an inability to pay off our debts, printing money, the steepening yield curve… Paul Krugman is having none of it. Not only that, he argues in his latest column, it’s all being driven by conservatives eager to torpedo the Presiden’t recovery efforts.
On the matter of our exploding debt, he says it’s a long-term concern, but that plenty of countries have sustained as-high (and higher) debt-to-GDP ratios.
And he says the Fed isn’t printing money, as we, and other, keep saying.
Now, it’s true that the Fed has taken unprecedented actions lately. More specifically, it has been buying lots of debt both from the government and from the private sector, and paying for these purchases by crediting banks with extra reserves. And in ordinary times, this would be highly inflationary: banks, flush with reserves, would increase loans, which would drive up demand, which would push up prices.
But these aren’t ordinary times. Banks aren’t lending out their extra reserves. They’re just sitting on them — in effect, they’re sending the money right back to the Fed. So the Fed isn’t really printing money after all.
To some extent, we think he’s right in that there are an awful lot of people talking about the debt and monetary policy who weren’t talking about it under Dubya. It’s pretty rich for Republicans, especially, who had no interest in deficits or too-cheap monetary policy to all of the sudden act like hawks.
That being said, Krugman is practicing his own form of intellectual creativity. He notes at the very end, for example, that “we need to start laying the groundwork for a long-run solution,” to the debt without any indication of why it’s a significant issue or how we’ll possibly summon the political will to take care of it.
And even to the example above, he notes that bank lending hasn’t gone up (the banks are just sitting on the cash, keeping it at the Fed) but then, what have we really accomplished?
Well, to some extent, we may be slowing what otherwise would be rapid asset deflation by keeping lending stable. BUT if asset prices need to come down (and only the market knows this) then the mere act of preserving the status quo is a form of creating inflation. It’s all relative, you know.