Krugmanian Prescription

Paul Krugman, prominent opinion writer at the New York Times, says we are not in the midst of an economic recovery, contrary to what administration officials might say.  It's hard not to agree with with him on that point.  On the other hand you might disagree with his prescription for it.  

So what should officials be doing, aside from telling the truth about the economy?

The Fed has a number of options. It can buy more long-term and private debt; it can push down long-term interest rates by announcing its intention to keep short-term rates low; it can raise its medium-term target for inflation, making it less attractive for businesses to simply sit on their cash. Nobody can be sure how well these measures would work, but it’s better to try something that might not work than to make excuses while workers suffer.

It is upon this try-something-try-anything approach that some may disagree, particularly the part about raising inflation targets.  Back in May the Mary Anastasia O'Grady had a conversation with Richard Fisher of the Dallas Federal Reserve Bank, who warned against monetizing US debt.

I think the trick here is to assist the functioning of the private markets without signaling in any way, shape or form that the Federal Reserve will be party to monetizing fiscal largess, deficits or the stimulus program."

The very fact that a Fed regional bank president has to raise this issue is not very comforting. It conjures up images of Argentina. And as Mr. Fisher explains, he's not the only one worrying about it. He has just returned from a trip to China, where "senior officials of the Chinese government grill[ed] me about whether or not we are going to monetize the actions of our legislature." He adds, "I must have been asked about that a hundred times in China."

This raises a couple of questions.  If the Fed raises inflation targets, embarking on a courses that monetizes the debt, with what is it going to buy more long-term and private debt?  Who is going to finance the US deficit, and at what interest rate?

He returns to events on his recent trip to Asia, which besides China included stops in Japan, Hong Kong, Singapore and Korea. "I wasn't asked once about mortgage-backed securities. But I was asked at every single meeting about our purchase of Treasurys. That seemed to be the principal preoccupation of those that were invested with their surpluses mostly in the United States. That seems to be the issue people are most worried about."

As I listen I am reminded that it's not just the Asians who have expressed concern. In his Kennedy School speech, Mr. Fisher himself fretted about the U.S. fiscal picture. He acknowledges that he has raised the issue "ad nauseam" and doesn't apologize. "Throughout history," he says, "what the political class has done is they have turned to the central bank to print their way out of an unfunded liability. We can't let that happen. That's when you open the floodgates. So I hope and I pray that our political leaders will just have to take this bull by the horns at some point. You can't run away from it."

According to Mr. Fisher, what Krugman recommends is the political solution – to print our way out of our unfunded liabilities.  Nothing surprising about that.  Paul Krugman is, above all else, political.

Comments

[jorod]

People don't care about long term rates. All they care about is the money in their wallets. And there will be a lot less come January 1.

[CaptDMO]

Tell me again, EXACTLY what is it from Mr. Krugman's, writings, resume, CV, demonstrates his competence/value in discussing economic "theory", and who's "ideas" that are plagiarized have EVER resulted in undeniable long term success, by OTHER than select Wikipedia(tm)"editors"?