Paul Krugman: The Printing Press Mystery


The Printing Press Mystery, by Paul Krugman, in NY Times: John Plender at the FT seems mystified by something that has become obvious lately: bond vigilantes are only going after countries that no longer have their own currencies. He writes:

The underlying logic is that no country defaults on its domestic bonds if it retains the right to set the printing presses in motion. Yet it seems counter-intuitive that bond markets, with their traditional fear of inflation, should punish a country for not being able to debase its currency.

Oddly, he seems unaware of the pretty good explanation offered by Paul DeGrauwe, which I’ve sketched out a bit further.

Part of the answer is that countries on the euro are stuck with a severe competitiveness problem that can only be resolved with grinding deflation, making their debt problems worse.

On top of that, however, is the proposition that countries without a printing press are subject to self-fulfilling crises in a way that nations that still have a currency of their own are not. The point is that fears of default, by driving up interest costs, can themselves trigger default — and that because there’s a crossing-the-Rubicon aspect to default, once a country crosses that line it will probably impose fairly severe losses on creditors. A country with its own currency isn’t in the same position: even if it is pushed into some inflation, there’s no red line that need be crossed.

That’s why America isn’t Greece; and why the UK is being foolish in imposing eurozone-type austerity on itself.

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