It's Friday, so I must be channeling Paul Krugman

Seriously. Paul has been on a tear recently. First, he tore a new bunghole on those who say we and the Brits can't run deficits right now because the bond markets will "cut us off at the knees." Excuse me? Where are the bond markets going to put the money that you’re saying will be “cut off at the knees”? Into mortgage-backed securities? Into BP bonds? Bwahaha! Yeah, as if.

The fact of the matter is that there is no investment more secure than U.S. or British government bonds. You see, there is this new invention that you may have heard of. I know conservatives disdain new things, but this new invention exists anyhow. It was invented in the mid 1400’s, and is called the PRINTING PRESS. Conservatives may have heard of it at some point in time, though clearly they feel that it is a dubious innovation because if God had intended anybody other than monks to write books out in longhand on parchment, He would have sent down the printing press along with His holy son. But in any event, as long as British bonds are denominated in pounds sterling and U.S. bonds are denominated in U.S. dollars, the chances of default on British or U.S. bonds are effectively ZERO (since the Bank of London or Federal Reserve could always simply print the money to repay the bonds if necessary), and they are attractive to investors accordingly, which is why Britain and the U.S. are paying effectively 0% interest on sovereign debt when it sells bonds at auction.

And lest you then start saying, “WEIMAR REPUBLIC! INFLATION! BLAH BLAH BLAH!”: Our current situation is entirely different from the Weimar Republic. Two words for you: “slack resources”. When there are slack resources in an economy — when there are unemployed people, when there are underutilized factories, and so forth — it is impossible for there to be inflation as long as the newly printed money is used to buy goods and services within the economy. The reason is that any newly printed money simply mobilizes those slack resources and increases the goods and services in the economy. Inflation is caused by a mismatch between the amount of money in the economy and the amount of goods and services in the economy — i.e., more money is printed than there are goods and services to spend it on. This was the Weimar Republic's problem -- the newly printed money was used to buy *gold* to send to the French and British as war reparations, which increased the supply of money in the economy but did not increase the supply of goods and services in the economy. Thus inflation.

But that is certainly not the case today. Today the problem is not enough money, not too much money. The auto makers with lots full of unsold autos would beg to differ with you if you insist that there is more money than goods for sale (the basic requirement for inflation to happen) — they will tell you flat out that there is not *enough* money in the economy to buy their product, not that there is *too much* money in the economy. Similarly, the unemployed bloke looking for a job will beg to differ with your assertion that there is enough money in the economy — he’s not being hired because there isn’t enough money in the economy to hire him, not because there’s too *much* money in the economy. We have measures for inflation to determine when too much money is being printed, and on every single one of those measures, the problem they show is that not *enough* money is being printed — i.e., that we are in active *deflation*. Too much money has disappeared under (virtual) mattresses as “reserves” — into the Federal Reserve’s (virtual) vaults, into the Bank of London’s (virtual) vaults, and so forth, where it is no longer in the economy available to purchase goods and services.

Those are the facts. I realize that conservatives object to facts that do not agree with their ideology, but reality simply *is*, and laughs at our puny limited human ideologies. In any event, it gets discouraging attempting to teach people basic economics when they want to instead believe the magical thinking and wishful imagination that is “conventional wisdom”, but so it goes. The observation that inflation happens when there is more money than goods and services to purchase with that money is not my observation. That is an observation by that loony liberal lefty Milton Friedman back in 1948 (the same Milton Friedman who spent his lifetime trying to get rid of public schooling as “socialism”, yes, that “loony lefty”). This is not new knowledge, it is not untested nor unproven, yet for some reason people still prefer to believe conventional wisdom, which holds that printing money is bad in *all* situations, not just in the situation where it results in more money being printed than there are goods and services in the economy to buy with said economy. Milton Friedman was quite clear that printing money while the economy was in deflation was a quite valid thing indeed to do — in fact, he even coined the term “helicopter drops” to describe the process.

In other words, this isn’t loony Keynesianism, even, it’s just plain old monetarism, about as controversial in the economics field as soda biscuits. It is as if I am in a convention of the Flat Earth Society, trying to convince them that the Earth is round as they resolutely insist that the photographs by our astronauts in orbit were faked. What can one do in such circumstances, if they refuse to accept evidence that the world is, in fact, round, other than derisively call them ignorant morons?

-- Badtux the Frustrated Economics Penguin
who wonders how Krugman goes to work every morning without going postal on all the lunatics and morons who refuse to live in the same universe as the rest of us.