Just Pay It Off

Krugman again. He writes:

OK, there are signs that the Fed is nerving itself up to do something more to support the economy. The question is, how much are the kinds of actions likely to be on the table likely to matter?

Here's what he looks at:

• Will the Fed buy long-term government debt?
• Will the Fed buy private debt?
• Will the Fed commit to a higher inflation target?

PK thinks the higher inflation target is the best option, if least likely. I don't even want to talk about that option. I want to talk about the Fed buying debt.

Krugman thinks the Fed can reduce long-term interest rates -- that's PK's goal -- by buying up debt. But he doesn't think it would have a "strong" effect. And he thinks it would take trillions of dollars of buying; probably closer to ten trillion than two.

Yikes.

Krugman wants to jack up inflation. This is Scott Sumner's idea, and Sumner says it well. But Krugman doesn't say why he wants to send inflation higher. So I'm gonna guess at that.

Inflation devalues debt; it makes existing debt smaller. If by inflation you double your income in the next three years, your mortgage payment will be a lot easier to bear. I think that's Krugman's goal, or part of it: to make the debt bearable.

PK, PK, I'm shakin' my head here. If you want your plan to be popular, number one, don't be calling for more inflation. I know, I bought my old house back in 1977 and with the inflation that soon followed, in a few years my monthly mortgage payment seemed like a joke. I know. But it doesn't matter. People don't want another bout of severe inflation, Paul. I don't. It doesn't matter if it would help us. It's not a solution, Paul. It's not a solution. Inflation is not a solution.

The problem is debt, Paul. You know: The Fed might buy up some of that debt, you were saying...

Paul, what are you thinking? If the Fed buys up tons and tons of debt, eventually lenders will be in good shape again. And then they'll be ready to lend again. And they'll be willing to lend us even more money, and create even more debt. Paul, what are you thinking?

Paul, Paul, Paul: It is time to stop thinking only in terms of lenders. It is time to start thinking in terms of borrowers.

Paul, the problem is debt. I don't care who owns it. I care who owes it. If the Fed buys up all the debt, every last bit, nothing has changed for me. Nothing has changed for anybody. Only for the lenders. And then they'll be ready to lend more. To hell with that, Paul! What were you thinking?

Okay, if the Federal Reserve was gonna buy debt, they would print money and use that money to buy the stuff. And then they would have the debt, and the lenders would have the new money.

What does that do for me?

Here's what I want you to do, Paul. Stop thinking only about the lenders. Start thinking also about the borrowers. Supply and demand, remember Paul? Supply and demand. Lenders and borrowers.

Here's what I want the Fed to do, Paul. I don't want them to buy debt. I want them to make debt go away. I want them to take their trillions that they're gonna use to buy debt. And I want them to use that money to pay off debt. Pay it off. Just pay it off. Make the debt go away. That's what I want.

And I'll tell you Paul, that's the only thing that will end this problem. The only thing.