Everyone knows that the solution to debt is more debt.
That’s an immutable truth, as critical to the pseudoscience of economics as Newton’s first law is to physics. We know it to be true because it’s propagated by one of the greatest economic minds in the history of the world:
So a lot of debt is good, and a whole lot of debt is better. But you already knew that. Nothing out of the ordinary there.
You might also have caught on to the fact that the cabal of central planners who occasionally meet in the Eccles Building (which, hilariously, is named after the man who once told a congressional committee that forcing “the Fed to buy government securities for the purpose of defending a fixed pattern of interest rates.. makes the entire banking system .. and engine of inflation") and discuss how best to destroy your savings, disappear the middle class, and exacerbate the wealth divide has been hard at work for the past seven years enabling the Treasury ponzi scheme that helps keep the US government afloat.
This multi-trillion dollar effort to artificially suppress government bond yields has, along with Fed funds rate tinkering, succeeded in driving rates into the ground. Unfortunately for the PhD economist-turned central planner crowd, there’s this thing called physical currency, and damned if it doesn’t have the really inconvenient effect of creating an effective lower bound on rates. After all, if you push rates too far below zero, rational actors will eschew bank deposits in favor of the mattress.
Of course you could just take physical currency into the back alley and execute it, then bury it in a shallow grave, and then you’d be free to micromanage the economy at every turn. And while the calls for a cash ban are indeed getting louder [8] as central banks bump up against the limits of monetary policy, eliminating cash might be the last straw for the huddled masses and because no one wants to see the torch-wielding villagers storm the Ivory Tower, the powers that be need to come up with a new solution to give them more room to ease in the event a 1937-style post-liftoff collapse happens and the Fed is forced to go right back to ZIRP and QE.
As it turns out, such a solution was right under the FOMC’s nose: the problem can be fixed with more debt.
Here’s Bloomberg [9]:
Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said it could be a good idea for the U.S. government to issue more debt as this would help lift the economy’s long-run neutral rate of interest.
Increasing the supply of assets available to investors “would push downward on debt prices, and so upward on the long-run neutral real interest rate,” Kocherlakota said Thursday in Frankfurt in remarks prepared for delivery at a conference hosted by Germany’s Bundesbank.
Lifting the so-called neutral rate, which prevails when Fed policy is neither stimulating nor restraining growth, would in turn benefit Fed policy makers by creating more space between the benchmark federal funds rate and zero, he said.
There you go. Krugman’s law to the rescue. But before anyone gets too indignant at this latest example of Keynesian insanity, note that Kocherlakota isn’t saying fiscal policymakers should issue more debt. He’s only saying that if fiscal policymakers did issue more debt, the Fed would really appreciate it:
"I want to be clear at the outset that I am not saying that it is appropriate for fiscal policymakers to increase the long-run level of public debt. I am simply pointing to one benefit associated with such an increase: It allows the central bank to be more effective in mitigating the impact of adverse shocks to aggregate demand."
Of course "mitigating the impact of adverse shocks to aggregate demand" is simply another way of saying "boosting economic output," so what Kocherlakota is actually saying is this: "We may very well end up needing more room to ease policy rates as well as more debt to monetize and increasing the long-run level of public debt accomplishes both goals."
Or, more simply: "Let's kick this can a bit further down the road and do the exact opposite of what we need to do in order to find a long-term, sustainable solution."
