Business Insider
March 27, 2011
Paul Krugman added another post on the potential impact of large deficits on the U.S. economy in which he argues that it doesn't matter that the U.S. can print its own currency; it still faces the same constraints from financial markets. I would argue that it matters a great deal for two reasons that I laid out in my previous post.
The first reason is that at any point in time the Fed would have the option to intervene in bond markets and buy up debt, if private investors were demanding very high interest rates. This is important because the decision by the Fed to not buy debt would always be a policy choice, not an economic fact.
There is a popular mythology in economic policy circles that in 1979 there was no alternative to putting Paul Volcker in as chair of the Federal Reserve Board to really tighten the screws and get inflation under control. At the time inflation was rising and the dollar was falling. Volcker sent rates through the roof, giving us the recessions of 1980 (destroying Carter's re-election chances) and then 1981-82. The latter recession was at the time the worst of the post-war era.
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