A License to Print Money 3

A little while back I expressed disappointment that Paul Krugman seemed to hold back from an obvious conclusion that printing money was the sensible course of action given the current economic predicament (weak overall demand, high private debt levels).

So it is good to see that he stuck his nose out a little further on this topic while I was away.

Says Krugman,

"In the end, I’d argue, what must happen is an effective default on a significant part of debt, one way or another. The default could be implicit, via a period of moderate inflation that reduces the real burden of debt; that’s how World War II cured the depression. Or, if not, we could see a gradual, painful process of individual defaults and bankruptcies, which ends up reducing overall debt."

It's also reassuring to see that, since I wrote this post summarizing my thoughts on the economic situation in mid-2009, the views of notable economists I respect (such as Paul Krugman) seem to be coming around much more to the view I articulated at that time - in particular that we either need to inflate or default in order to reset our debt to a much lower level. Or maybe they knew this all along and are just now becoming willing to spell it out clearly - either way, it seems like progress to me.

A License to Print Money 2

Let me preface this by saying that I'm a fan of Paul Krugman. I've read most of his books, read almost everything at the Paul Krugman archive, and read all of his columns and blog posts since he started working for the NY Times. This blog even has a 'Krugman was right, I was wrong' tag that I use on occasion.

Another strand to this post is that, over time, I've generally come to the conclusion that the simplest way out of the current economic mess for the U.S. would be to print money and distribute an equal share to each citizen until they get a little bit of inflation and a reduced debt load for debtors.

So imagine my disappointment when I read this recent post by Paul Krugman where he said,

"So why not forget about open-market operations, and just drop the stuff from helicopters? Well, remember that at this point cash and short-term bonds are equivalent. So a helicopter drop is just like a temporary lump-sum tax cut. And we would expect people to save much or most of such a tax cut — all of it, if you believe in full Ricardian equivalence."

Both Tyler Cowan and Brad Delong immediately noted that this didn't make any sense, as did a vast number of commenters on the original post.

How disconnected from reality do you have to be to think that if you give money to people who don't currently have any, they wouldn't either spend some of it or pay down their debts with it?

What vision of America must you have to imagine that the only people in America that exist are people who, given a $5,000 cheque from the government, would save all of it and not spend a dime.

It's especially frustrating because it seems as though there is almost a conspiracy of silence around pretending that America's economic woes couldn't be solved by printing a little money. And when one of the few prominent people you can expect to be both knowledgable and a straight-shooter takes on the issue, he uncharacteristically dodges the question with half-truths and deception.

The jedi mind powers of the creditor class are powerful indeed.

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Updated to add, if you are interested in more elaboration on my opinion that printing money is the solution to the U.S.' economic problems, this post does a good job summarizing my views on the topic.

A Licence to Print Money

In light of recent debates over the political power and influence of the financial industry, I just thought I'd pass along a quote on the history of Siena, Italy - from the Lonely Planet travel guidebook,

"At the end of the 14th century, Siena came under the control of Milan's Visconti family, followed in the next century by the autocratic patrician Pandolfo Petrucci. Under Petrucci the city's fortunes improved somewhat until the Holy Roman Emperor Charles V conquered it in in 1555 after a two-year siege that left thousands of people dead. He handed the city over to Cosimo I de'Medici, who barred the inhabitants from operating banks and thus severely curtailed Siena's power."