[orlandob]

The title of the article is actually: "Nobody Understands Debt". A few years ago I discovered Modern Monetary Theory (thanks Warren Mosler, Bill Mitchell, Randall Wray, Stephanie Kelton) and it really opened my eyes to the universal misunderstanding of national debt. It boils down to this: the household debt model does not apply to governments that issue their own currency (USD, AUD, JPY, etc., but NOT the EUR).

[jschwartzi]

Which model applies and can you sum it up in a few sentences? I know it's generally accepted here to make an effort to deeply understand the issues behind the article, but one criticism I have of Krugman's article is that, while he does explain what he thinks Debt isn't, he never bothers to explain why the household model doesn't apply except in a dismissive sort of sense.

So what models apply and why?

[orlandob]

There is one major difference between households and sovereign-currency Governments: households can't create the money they use, but Governments can.

"So you're saying government debt doesn't matter? What about Zimbawe, Argentina, Japan, Pre-WWII Germany?"

First, I'm not saying that Government debt doesn't matter. Like all things, there are limits. What I am saying (and MMT says) is that there are conditions under which increasing national debt make sense - notably high unemployment and underemployment. ONLY the Government can kickstart an economy in this scenario. In those hyperinflation cases, you saw Governments whose debt was denominated by foreign currencies and they tried to print their way to solvency, which of course failed.

[sukilot]

MMT is Kenysianism, with a fresh coat of paint and slightly different policy. (I say this as Keynsian.)

MMT advocates the government directly printing money for stimulus, instead of going through the charade of creating debt and letting banks print money for themselves, and gets a little wacky by hinting that you can print money without inflation.

Fiat currency debt is just printing money. The nation isn't borrowing sheep or wood, the banks just increase some numbers in a digital file ("fractional reserve" banking, where someone else gets to spend money that is in your account at the bank)