Things I read in May.
I have been thiniking about Inflation and Krugman since Adam Tooze in the LRB last month. In this article in the NYTimes, Krugman argues that low interest rates are a result of a glut of savings rather than manipulation by the fed:
low interest rates aren’t the result of artificial manipulation: there really are a lot of savings with nowhere to go, which are being made available cheaply to the government. Second, because the daisy chain of lending runs through bank deposits, it shows up in the measured money supply. But it isn’t really a monetary expansion in the sense many people imagine. The Fed isn’t the Venezuelan government printing bolívars to pay its soldiers; it’s basically acting as a financial intermediary for investors who want to park their money somewhere safe.
But aren’t a lot of the extra household savings coming not from lower consumption, but from stimulus cheques? Or the fact that the breadwinner in the family works building aircraft carriers? In other words, isn’t the government deficit spending (Krugman’s fourth step) causally before households can have more savings (his first)?
I do not enjoy getting into economic arguments with Nobel laureates. What I know about economics could be written on the back of an envelope. So in the long and honourable tradition of small boys picking fights and then running to their big older brothers, I called my colleague Martin Wolf, the FT’s chief economics commentator.
He made the point that the excess savings are just the flip side of the deficits. They must emerge together. But savings cannot and do not create money. So the question of where the money came from remains, and the most likely answer is that it comes from government deficit spending… Krugman’s argument, in other words, is the wrong way round. And to my mind (if not Wolf’s) this suggests that the money printer is, indeed, going “brrr”.
Ross Douthat in the New York Times.