He seemed to be going there on the debt ceiling, just where the post Keynesians and MMTers, even Steve Keen, would want to take a discussion over the debt ceiling.
"I’ve had communications from a number of people asking an interesting question relating to the debt ceiling and other issues: why does the Federal government have to borrow at all? Why can’t it just print money to pay its bills? After all, haven’t people like me been saying that this isn’t actually inflationary?"
"Now, it turns out that there really is a problem, or actually two problems — but they’re a bit subtle."
"First, as a legal matter the Federal government can’t just print money to pay its bills, with one peculiar exception. Instead, money has to be created by the Federal Reserve, which then puts it into circulation by buying Federal debt. You may say that this is an artificial distinction, because the Fed is effectively part of the government; but legally, the distinction matters, and the debt bought by the Fed counts against the debt ceiling."
"The peculiar exception is that clause allowing the Treasury to mint platinum coins in any denomination it chooses. Of course this was intended as a way to issue commemorative coins and stuff, not as a fiscal measure; but at least as I understand it, the letter of the law would allow Treasury to stamp out a platinum coin, say it’s worth a trillion dollars, and deposit it at the Fed — thereby avoiding the need to issue debt."
"In reality, to pursue the thought further, the coin really would be as much a Federal debt as the T-bills the Fed owns, since eventually Treasury would want to buy it back. So this is all a gimmick — but since the debt ceiling itself is crazy, allowing Congress to tell the president to spend money then tell him that he can’t raise the money he’s supposed to spend, there’s a pretty good case for using whatever gimmicks come to hand."
"But leaving the debt ceiling on one side, isn’t it true that since spending can currently be financed by Fed money printing, we shouldn’t care at all about the notional debt owed to the Fed? Alas, no."
"It’s true that printing money isn’t at all inflationary under current conditions — that is, with the economy depressed and interest rates up against the zero lower bound. But eventually these conditions will end. At that point, to prevent a sharp rise in inflation the Fed will want to pull back much of the monetary base it created in response to the crisis, which means selling off the Federal debt it bought. So even though right now that debt is just a claim by one more or less governmental agency on another governmental agency, it will eventually turn into debt held by the public."
"We are living in weird economic times, where many of the usual rules don’t apply and there are big free lunches to be had. But not everything is a free lunch, even now. Sorry."
http://krugman.blogs.nytimes.com/2013/01/02/debt-in-a-time-of-zero/
It's Krugman himself who says that the debt ceiling is just a strange arrangement where the government via the Treasury asks for permission to pay for things from Congress which has already told the government to spend this money. Krugman also-like many economists, including a nemesis of his, Scott Sumner-has called for the end of the anachronism of the debt ceiling.
For the record the debt ceiling is not in the constitution and is actually a considerably more recent invention. Still, Krugman insists that there's an important difference between the Fed printing money and the Treasury printing money. To the extent that it's a legal difference, laws are made to be changed so that's not a problem.
Until then he has the MMTers with him. However, he ruins it by insisting that the distinction does matter-once the economy comes back we risk inflation. So he does believe in the vigilantes but only after the economy comes back? As to the monetary base, the post Keynesians like Steve Keen argue the monetary base doesn't matter-which is why blowing it up as Bernanke did in late 2008 had so little effect.
Anyway, we should expect more skirmishing in the future over this post by Krugman. Krugman is at the absolute dividing line between the establishment econ profession and the heterodox ideas. However, it seems he'll never quite cross it. He is even aware of the criticism that NK DSGE has a problem in not having debt in the model. However, he holds out hope that it can be brought in without upsetting the neoclassical belief in things like general equilibrium, rational expectations, and the efficient market hypothesis.
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