Inflation-Adjusted Bonds? You Must Be Kidding, Paul
Paul Krugman got a lot of attention among leftward tweeters today for following Glenn Greenwald down the road of writing about the de-evolution of the United States into a de-developed nation, because of the irresponsible preference of its ruling elite for lower taxes rather than infrastructure and essential services, and also because of impact of a generation of fantasy anti-government rhetoric on American minds. Again, I was happy to see Paul take this issue up, but would have been much happier if he done so with, perhaps, a little more fire, and a little more insistence on what the Government ought to be doing, and why we need not, ever, worry about deficits in the abstract.
In particular, I wanted Paul to talk about not just the specific problems of infrastructure and services, but more generally about the problems of Hooverism and deficit hawkism, and how they prevent us from meeting any of our challenges. However, he did raise that issue and did not pursue the matter of deficits and why we don’t have to worry about them for the foreseeable future. Paul did say:
. . . And the federal government, which can sell inflation-protected long-term bonds at an interest rate of only 1.04 percent, isn’t cash-strapped at all. It could and should be offering aid to local governments, to protect the future of our infrastructure and our children.
Of course, I agree that the Federal Government isn’t cash-strapped at all; but I couldn’t help wondering why on earth we have to offer and sell inflation-protected long-term bonds at all. When foreign governments acquire US Dollars by exporting to us, they can leave those dollars in a Federal Reserve Account, buy US dollar-denominated assets, sell the USD to other willing buyers for other currencies, or buy non-inflation-adjusted bonds. They have no other choices. So why would we want to float inflation-adjusted bonds? Are we afraid they leave their USD in a non-interest bearing reserve account, or that they might buy non-inflation adjusted Treasuries?
Better yet, why should we sell Treasuries to anyone at all? Why not just spend as we need to, and not incur any further federal debt? If we did that we’d shortly have lower and lower annual interest costs as we paid off existing debt. If course, we’d still have our deficits, which from the viewpoint of the private sector represent private savings. But we’d have little or no remaining public debt.
So, if we did that, the tea partiers, the Peter G. Petersons, and the Hooverites of the world, like Judd Gregg, and Mike Spence, would no longer be able to complain that we were creating more and more debt that would be visited on our grandchildren. Think of the blessed silence on this subject.
On the other hand, you can be sure that they’d immediately start to scream about how spending without debt is inflating the currency. But if they did that, it would be a great improvement over their screaming about increasing Federal debt; because then we could ask whether they had any facts showing that prices had gone up.
If they had none, which, by the way, they are unlikely to have until we reach full employment, we could then say: "well, now we have a problem of inflation, so let’s raise taxes on the wealthy first, to dampen excess demand, fight inflation, and began to create a more equal distribution of wealth, like the sort of distribution we had back in the 1950s and 1960s."
It seems to me that this kind of argument is one I’d like to have. How about you?