It’s [Krugman's] a valid point; his use of IS-LM in the liquidity trap (where deficit spending has no impact on interest rates but increases GDP) has been consistently insightful and correct, and it provides a good example of an economic model that works. JaredI often ask Paul, if multipliers are 1.3 then why are we at the bottom after 16 trillion in borrowing over 30 years. Why does the middle class take in in the shorts when deficit spending is high? Why did the Clinton regime of high taxes and shrinking federal government result in sustained growth? Why did California's budget flounder and go deeply red for two decades?
I never got an answer, until now. Jared explains it. We can no longer count. I have news for Jared, if bankers cannot convert from GDP growth to interest rates, then we are in very serious trouble. DC is bankrupt and the dollar no longer usable as a unit of account. Using this condition, Krugman's explanation is quite clear, government can borrow all it wants because DC is effectively bankrupt anyway.
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