In case you missed this – Paul Krugman answered a lot of questions on Reddit yesterday. It’s worth perusing for his views. I found this back and forth between Joe Weisenthal and Dr. Krugman of particular interest:
Back in the 2000s, you frequently blasted Bush for running large deficits. However in recent posts and interviews, you’ve said that a country with its own sovereign, un-pegged currency can’t ever face bond vigilantes.
What’s more, the sovereign currency issue seems to be something of a new line of thinking for you, given that initially you wondered why Italy and Japan were paying different rates given broadly similar economic conditions. Now you seem to have found peace with that question, based on the sovereign currencies issue.
Thus in light of this change of thinking, do you still stand by your comments regarding Bush’s deficits?
I was clearly too worried about bond vigilantes back in 2003 — and I’ve written on my blog conceding that mistake.
I wasn’t wrong, however, to condemn the Bush deficits. Deficits serve a useful function when the economy is deeply depressed, and in particular when monetary policy is up against the zero lower bound. You should not gratuitously increase debt in normal times, when any fiscal stimulus can and will be offset by Fed policy.
And don’t you wish now that we hadn’t run those unfunded wars and tax cuts? The ratio of debt to GDP would be 20 or 25 percentage points lower, and we’d be feeling a lot more relaxed about current deficits.
I personally don’t think Dr. Krugman is taking the full view here. With the massive current account we were running in the early 2000’s the Bush budget deficits actually helped bolster growth substantially. Had we not been offsetting the current account deficit we would have suffered a massive demand leakage that would have prolonged and probably worsened the 2002 recession….
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.