E Paul Krugman Wants To Bless Us, But It Is Mostly For Wall Street

The following is a slightly tongue in cheek interpretation of Paul Krugman's ideas based on the history of Alexander Hamilton, versus my fantasy for America and there may be a still better third option discussed at the end of this article. One thing is certain, we do not live in the age of Alexander Hamilton.

My economic fantasy for America is the hope that the treasury will keep some of its valuable gold for all of us. I am not talking about the inferior stuff, the gold that may or may not be at Fort Knox. No, I am talking about the superior gold, the treasury bonds that we could use to make money for the government. In the derivatives markets, treasury bonds are more valuable than gold itself!

Capitalism in the form of structured finance is failing main street. My fantasy is that the government would engage in a little capitalism of its own and spread the wealth. My fantasy has few takers. Mr Krugman's ideas, on the other hand, are embraced by the New York Times and media all over the world. He wants the government to spend more. I will explain exactly why he wants that spending in a moment.

If you think my fantasy is so far off base, you need to gain a glimpse into the really interesting, yet startling things Paul Krugman throws out once in awhile. He is quite entertaining, and yet he is very influential. If you think my idea for the government to engage in structured finance is insanely wild, Krugman seeks to convince us that we are blessed if we give Wall Street the gold for its own structured finance. He writes to a solution regarding the hot button issue in macro economics, the shortage of bonds, the new gold, as collateral. Wall Street loves him. He won a Nobel Prize.

Krugman joins others I have written about, Kocherlakota, Summers, and many others who are worried about the shortage of collateral, i.e., the shortage of bonds as gold, which could have the effect of slowing down the economy. I don't disagree with this likely shortage. But why do we always have to establish solutions that make for a better deal for Wall Street and a worse deal for our nation?

The Krugman article that contains this quote appeared recently in the New York Times where he said:

...That is, bonds issued by the U.S. government would provide a safe, easily traded asset that the private sector could use as a store of value, as collateral for deals, and in general as a lubricant for business activity. As a result, the debt would become a “national blessing,” making the economy more productive....[emphasis mine]

 ...This argument anticipates, to a remarkable degree, one of the hottest ideas in modern macroeconomics: the notion that we are suffering from a global “safe asset shortage.” The private sector, according to this argument, can’t function well without a sufficient pool of assets whose value isn’t in question — and for a variety of reasons, there just aren’t enough such assets these days....

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Disclosure: I am not an investment counselor nor am I an attorney so my views are not to be considered investment advice.

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