Great Leap Forward

Paul Krugman Does Modern Money Theory: Today’s Links

NYTimes columnist Paul Krugman came across Modern Money Theory several years ago and periodically opines that we have something or other wrong. (See my response to one of his columns here:

And other times he adopts MMT without acknowledging the source. Yesterday, for example.

For some time he’s been wondering why Japan–with a government debt ratio just north of 200%–enjoys essentially zero interest rates, while periphery Euro nations suffer under government bond rates of 6%, 7% or more–with debt ratios half as high. Of course, MMT has explained the reason for the past decade and a half–and correctly predicted the crisis currently gripping Euroland.

But on 11-11-11 Krugman “discovered” the answer: Euro members gave up their currency sovereignty in favor of what is essentially a foreign currency–the euro. Who wudduv thought?

Yesterday John Carney at CNBC picked up on the argument made by MMT-er Cullen Roche that Krugman is channeling MMT.
Here’s the link to Carney’s post:
Here’s the basic argument:

Carney: It seems pretty clear that the school of thought known as Modern Monetary Theory has made a big impact on Paul Krugman’s thinking. As Cullen Roche at Pragmatic Capitalism points out, just a few months ago the spread between bonds issued by Japan and Italy, which have similar debt and demographic issues, was perplexing Krugman. (See Cullen’s post here:

Krugman: “A question (to which I don’t have the full answer): why are the interest rates on Italian and Japanese debt so different? As of right now, 10-year Japanese bonds are yielding 1.09%; 10-year Italian bonds 5.76%. …I actually don’t have a firm view. But it seems to be an important puzzle to resolve.” (See here:

Yesterday, however, Krugman finally found his answer in MMT (here:

Krugman: “What has happened, it turns out, is that by going on the euro, Spain and Italy in effect reduced themselves to the status of Third World countries that have to borrow in someone else’s currency, with all the loss of flexibility that implies. In particular, since euro-area countries can’t print money even in an emergency, they’re subject to funding disruptions in a way that nations that kept their own currencies aren’t — and the result is what you see right now. America, which borrows in dollars, doesn’t have that problem.”

Well, live and learn, as they say! Welcome aboard, Paul!

47 Responses to “Paul Krugman Does Modern Money Theory: Today’s Links”

CriticNovember 12th, 2011 at 10:44 pm

As for an analysis on Japanese money and credit I can recommend to read through Richard A. Werners (University Southhampton, allegedly the originator of the term quantitative easing) work. He lived in Japan for a couple of years and did some interesting research on this topic.

For the conundrum why Japanese interest rates are lower than Italys, you just need to drop the EMH from your thinking and focus on bandwagon behaviour of the participants in the financial markets.

DismayedNovember 13th, 2011 at 12:27 am

"For the conundrum why Japanese interest rates are lower than Italys, you just need to drop the EMH from your thinking and focus on bandwagon behaviour of the participants in the financial markets. "

No – MMT has it right.

David O.November 13th, 2011 at 1:05 am

There may also be the issue that the vast majority of buyers of Japanese bonds are… Japanese!

I believe this is true – please take pleasure in correcting me if I’m wrong. But if I’m right, the conundrum is solved by considering this to be a (nearly) wholly family affair… Thus no need for MMT or even Neo Keynesianism – more a case for behavioral economics aka experimental psychology.

LRWrayNovember 13th, 2011 at 2:50 am

David: you are right on the facts but not on the causality. Where the owner sleeps is a red herring. All the owners of sovereign debt bank at the same bank: BOJ, FED, BOE. That is all that matters. If I (American) sell a US Treasury to a resident of Mars, the Fed changes the name on the "savings acct". The names and addresses change. The nature of the debt does not. It still gets serviced by keystrokes.

jownNovember 13th, 2011 at 2:51 am

dag …

I thought he was just sort of "saving face" by not calling the monetary system and operations "as they are" like MMT provides. I didn't suspect that he didn't fully get it (yeah, okay, not to say that I know it all like the back of my hand … but … ).

This might evidence how entrenched the old ideas and non-ideas about this are as well as the fact that it can be a bit difficult to pick up without a couple set "parameters" in place beforehand.

All the more reason to stay at it, with sharpness, vigilance, and big and open and loving hearts …

Thank you Dr. Wray.

MMT will love him him up, for sure! I expect a full endorsement of MMT from Dr. Krugman by 2017! He may surprise us though.

barnardpNovember 13th, 2011 at 2:40 pm

Randy, what's particularly annoying is that Mr Krug does not acknowledge the source of his new found inspiration. That's dishonest on you + all MMTers. And what's shocking is to hear a Nobel laureate saying "I actually don’t have a firm view. But it seems to be an important puzzle to resolve". God's sake, where do these people study their economics? Like hearing Chris Barnard saying "Why does blood circulate? I actually don’t have a firm view. But it seems to be an important puzzle to resolve". Paolo

David O.November 13th, 2011 at 6:40 pm

I must have missed something. I thought the specific issue was, why has Japanese govt debt maintained a low effective interest rate (high demand) despite a highly adverse debt/gdp ratio. I thought the answer to that lay in Japanese psychology – in the secondary market, which is mainly Japanese, they hold on to it, rather than sell it, and still try to get it if they don’t have it. Most other countries’ government debt is held by people without such tribal loyalty – who are quite happy to dump it and avoid buying it if they have any concerns about getting the nominal value back at the end of the term. What am I missing? What has this to do with MMT? And why – even more – is PK at all puzzled? This is all about national psychology not economics. It sure gives the lie (again…) to any assumptions about ‘rational’ markets.

David O.November 13th, 2011 at 7:10 pm

Of course – if you change the question to why can Italy not print money while Japan can print money – well, then we are into MMT territory…

LRWrayNovember 14th, 2011 at 2:31 am

A soveign govt that issues its own currency can have whatever interest rate it wants. Japan has low rates NOT because debt is held domestically (nor does it have much to do with psychology). It is because the BOJ has kept the overnight rate near to zero for over a dozen years and there is no reason to doubt it will keep it there for another dozen. Hence not only is the rate on short maturities low, but also on long maturities.

to be sure, sovereign govt can peg long maturities if it is willing to stand ready to buy them.

why is that MMT? Because MMT recognizes that rates on sovereign debt of the currency issuer can be determined by the issuer. there are no "market forces" operative. Italy however gave up its currency so is subject to mkt forces. Exactly as Krugman (now) realizes.

Jesse DarvasNovember 14th, 2011 at 10:25 am

"Where the owner sleeps" matters when it comes to buying and selling. For instance French banks are now dumping italian debt, which pushes rates higher. But Italian banks are not dumping the debt. It would never make sense for them to do so (and in any case their government could always force them to buy it if needed). Same thing for Italian households who love to buy their sovereign debt at 6%+. So if 100% of the debt was held by Italians, they would have no problem right now even though the debt is labeled in a "foreign currency".

Ron TNovember 14th, 2011 at 7:36 pm

Nodoby is talking about devaluation here. The question is why is Greece going bankrupt, and not Japan, although according to mainstream theories Krugman believed not long ago it should have gone bankrupt 15+ years ago.

Ron TNovember 14th, 2011 at 10:22 pm

He thought the market dictated the interest rate the country pays. His post linked in the article exemplifies the confusion.
It follows from the textbooks talking about countries borrowing money in the market. The point is that Greece does and not Japan – it can't, it has to spend first. If Japan was on the mercy of the market it would meet Greece's fate loooong time ago. Krugman was confused why Greece did and Japan didn't.

Joe FirestoneNovember 15th, 2011 at 2:40 am

Randy I don't think, PK's realizing that the currency issuer vs. currency user distinction is the explanation for the observed difference is more than a small step toward MMT. He still has to give up his revised Quantity Theory of Money and abandon his notions about the danger of hyper-inflation to get there. I think making that leap will prove difficult for him.

As for the idea that an "it's all in the family explanation" explains Japan, David O., I think MMT's view that the central bank can control interest rates of the public debt is true. The theory is stated in a number of places; but randy's reasoning here:

is quite compelling, and speaks to the question of whether that control is influenced by who owns the debt!

TatsumotoNovember 16th, 2011 at 8:18 am

On the question of low rates of the Japanese Government Bonds (JGB), David O may be closer than LR Wray who states: "a sovereign govt that issues its own currency can have whatever interest rate it wants." I don't think this is the case. In Japan, there is a considerable reservoir of purchasing power coming from the private sector, households and corporations, in the form of savings deposited with the financial institutions, this being in spite of the generally stagnant economy. Since the bursting of the bubbles in the early 90s, Japanese economy has been devoid of demand for credit for economic expansion in the condition of the so-called balance sheet recession. (see Richard Koo, The Holy Grail of Macro Economics.) The domestic financial institutions, banks and postal savings, are only allowed to park their customers’ deposited cash domestically and are not permitted to go outside Japan to play financial games. There is a huge glut of cash year after year deposited with and held by these banks. This is the reservoir of liquidity that absorbs the JGBs. shortfalls. (to be continued)

TatsumotoNovember 16th, 2011 at 8:19 am

Japanese Government Bonds enjoy low rates because of these captive (Japanese domestic) buyers, financial institutions, having no other alternatives but to keep buying the JGBs. Is this dangerous? Yes, eventually banks may stop buying the JGBs. At present, the Japanese ownership of the JGBs hovers around 94%. It used to be higher. China, including Hong Kong, tends to buy and sell in large sums, which represents risks because the nature of such transactions is akin to hot money. An analogy may be drawn in the case of Japanese buying their own JGBs that a tight-netted family in a household extending loans among themselves for their own use. What goes out from one arm, both principals and interests, comes back to the other arm, call it social fabric, if you will. If and when this social fabric is broken, Japan may face exploding interest rates. If non-Japanese ownership of the JGBs increase significantly, this social fabric may be broken. Also, ironically, if the economy recovers significantly, banks will find better utilization alternatives for their cash reservoir and may want to liquidate their JGB holdings thereby raising yields. When this happens, one would hope the rising nation’s tax revenues would more than compensate for budget

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