Fed Watch: 14,000 by Tim Duy

Fed Watch: When Deficits Become a Problem by Tim Duy

JW Mason comments:

I'm afraid Tim Duy is wrong, Randy Wray is right, and Krugman is contradicting himself.

It is one thing to say that the **flow** of demand for current output caused by large deficits can be inflationary. It is a different thing entirely to say that the **stock** of debt is an independent constraint on policy or a factor in interest rate determination. 

Yes, if a government spends far more than it collects in taxes, this can lead to aggregate demand aggregate supply constraints, driving up prices. MMT has always said this. But what matters is the size of the output gap. The relationship between the government budget balance, the output gap and inflation is exactly the same whether the debt-GDP ratio is 20% or 200%.

I don't know what to make of this. Mason is a smart guy but I don't understand what he's saying and Duy and Krugman have been wrong before.

But I don't trust the MMTers! Intellectual snake oil salesman with dodgy rhetoric about how deficits don't matter and claims that they never said that.

What is Mason saying? That the limit is set by how much in taxes the government is able to collect?

Unexpected inflation is in effect sort of hidden surprise tax increase in that it devalues the contracts creditors hold from when they originally drew up the the debt contract.

Likewise an extremely slack labor market is in effect a tax on workers in that it weakens their bargaining power and enhance the "threat of the sack."

See Michal Kalecki.