Paul Krugman Talks to Bill Moyers About How to Speed Recovery -- And Why He Doesn't Want to Run the Treasury
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BILL MOYERS: We keep hearing from the right that we're here on the path to becoming Greece, and you say that that's impossible?
PAUL KRUGMAN: Yeah. We, even if, suppose that people decided, investors decided they don't like U.S. government debt, it can't cause a funding crisis because the U.S. government prints money. It’s even hard to see how it can drive up interest rates because the Fed sets interest rates at the short end, and why exactly would the long run rates go up if you don't expect the Fed to raise rates? It could lead to a weakening of the U.S. dollar against other currencies.
But that's actually a good thing. That would make U.S. exports more competitive. That would actually boost our economy. So it's, actually impossible to tell that story, as far as I can tell. And yet, it's not, again we're mostly not in the realm of rational discourse here. It's one of those things where people say it, they hear other people saying it. And they don't actually try to work it through.
And it plays a big role, I'm sorry, in influencing our public discussion. Interestingly, people who actually have money on the line, that is people who are buying bonds, just keep on driving U.S. interest rates ever lower. So actual investors don't care about this stuff. But our political class does.
BILL MOYERS: Why don't they care?
PAUL KRUGMAN: Because first of all, because I think at some level investors understand what I'm saying. That it's very difficult to see any reason why the Fed would raise short term rates, which is controls for years to come. And in that case, long term debt even at a pretty low interest rate is a reasonable investment. Hard to see how a financial crisis actually develops against the United States, U.S. government, which is in this you know, has all the luxury of printing its own currency.
And investments are always about compared to what, right? If you if you say, "Well, the U.S. is a dangerous place to invest," I don't think it is, but particularly where is the safe place that people are going to invest? You know, what is this other asset that they're going to buy? And it doesn't really exist.
BILL MOYERS: You say we're in a liquidity trap. I don't understand that.
PAUL KRUGMAN: Basically, a liquidity trap is we're, back up for a second. How do we normally deal with a recession? How do we deal with a garden variety recession like the 2001 after the dot com bubble burst, or 1991? The answer is that basically the Fed, the Federal Reserve goes out there and prints money.
Or strictly speaking credits banks, you know, credit banks with that extra reserves and buys treasury bills. And that normally starts a chain of events where, okay, the banks have got extra reserves, they lend them out. They, that drives down interest rates, leads to a whole series of events, which ends up with the economy picking up some steam. And what the Fed is doing in that case, it's supplying extra liquidity to the system.
PAUL KRUGMAN: But now we're in a situation, we're awash in liquidity. We've already got, I mean, interest rates are zero. And so anybody you say, "Well, we're going to give you some more cash and you're going to go lend it out," and banks, everybody's going to say, "Well, why would I want to do that? I mean, interest rates are zero. It's, there's no particular incentive for me not to just sit on this cash."