Open letter to Paul Krugman - Or - The "Debt's Not a Problem When We Owe It to Ourselves" Tale

Dear Professor,

In a number of your columns (one here) you strongly assert that those who cry for fiscal prudence—that is, Washington spending within its means— "have no idea what they’re talking about — and the people who talk the most understand the least."

You support your case with the fact that financial markets "continue to lend to the U.S. government at incredibly low rates" ("incredibly" is indeed an apt description). But have you noticed "financial markets" (people that is) can change their collective mind very quickly? Yes, I'm talking about Europe. And how long do you suppose "financial markets" will accept a 1.7% yield on ten-year paper denominated in a currency that is expanding in supply to the tune of hundreds of billions a year? In other words, how long will "financial markets" be willing to lose money, in real terms, on their investment? Of course I'm referring to the "financial markets" that haven't unloaded their government debt onto the Fed's balance sheet. I guess, therefore, I should ask as well; how long can the Fed continue to create money to prop up the treasury market? Even you would agree this can't go on forever.

You've said that the debt is not a problem because we largely owe it to ourselves. That, somehow, the comparisons to over-indebted families just don't fly—because they owe "someone else". So then (keeping it in the family)—from the family-member creditor's perspective—if my brother continues to spend more than he makes, year in and year out, and borrows from me to keep afloat, by your way of thinking I'll continue to fund his lifestyle ad infinitum. Thus my brother's debt to me, however great, is of no burden to him—being that I'm family. Of course, as I'm sure you agree, that story—by itself—is utter nonsense. So, to be fair to your position, we must pretend that my brother would have his own currency—that he can print from the comfort of his own basement. And we must assume that me and the rest of the family (we are, by the way, a large family among a world of families) would be forever willing to trade our wares in exchange for his currency—since he produces all kinds of stuff that me and the rest of the family will always buy.

So, in our scenario, my brother continues to spend beyond his means, and borrows from me (having accumulated vast reserves of his currency) to make up the difference—thus a forever-greater portion of his income will go toward interest payments to me. And when those notes come due there must be other family members willing to buy his debt—otherwise I'll simply extend the terms. Hmm... So then, as he services this expanding bubble of debt, along with the ever-growing commitments he's made to the less-productive members of our family (my brother's a generous soul), he's having to divert resources away from the production of the stuff he sells to me and the rest of the family. Meaning, therefore, that his capacity for producing stuff is decreasing—relative to the supply of his currency circulating throughout the family. And God help us if he decides to start printing.

Pardon my condescension—I know, you are the economist—but the thing is, in this we-owe-it-to-ourselves tale, I am my brother's creditor. And I assure you, contrary to what you'd have your followers believe, there'll come a day (brotherly love notwithstanding) when I say enough's enough—when I tire of receiving payments in a currency that only buys a fraction of what it did when I lent him the money (there are other families, with other currencies, in the world I can trade with). And when that day comes and I stop funding my brother's lifestyle, make no mistake (for I know my brother), he'll come a begging for more credit. And if I'm of a mind to accommodate him yet again, I'll require a substantially higher return. But before we go there, I will impose myself onto his business, and demand massive spending cuts—lest I allow him to resort to his printing press to pay me back with his worth-less currency.

You see Professor, in our scenario I am your "financial market", and—sheltered as you've been from the real world—you do not know me very well.

Sincerely,
Marty Mazorra