Krugman asks, Why doesn't Treasury borrow short?

He's back:

"the predictions of Hicks-type liquidity trap analysis"

Short term rates are low because Treasury does not borrow short term.  We went through this, many times. If this was a liquidity trap then Treasury could borrow indefinitely at the short end where YoY rates are .23.  In fact the one year bond was sitting at .17 for a long time. Treasury tested Krugman's theory, borrowed short and ran the rates up to .23, equal to the rate on reserves.

It's not Hicks, its Treasury in DC, they are the ones who let the excess reserves pile up. Why pay 2.3%, the ten year rate, when vast stores of liquidity are available at the one year rate? Its not Hicks for the umpteenth time, Treasury would simply overwhelm the reserves, drain them in about 6 months if it tapped those reserves.  Congress cannot manage a 2 trillion dollar rollover at the one year rate, Congress does not have the flexibility.

Krugman is simply trying to divert attention from the debt problem by relying on some magical property of the Fed.  Its not the Fed, its not Hicks. The liquidity trap is Congressional debt: Congress has more debt then it has budget flexibility.  Congress is screwed because Congress was fooled by the Kanosian Magic.

There is some crazy theory around that says money is created when government borrows.  How stupid! Money is created when the Fed takes losses about once every 40 years.  Then Congress consumes all the liquidity over the period, we have a war or some other catastrophe, and the Fed takes another round of losses.  I dunno where these crazy economists get their version of history, but this is how the USA has done it since it was founded. 

We tested Krugman's Theory

That is the thing.  Months ago he was spouting this stuff, so we, and his undergraduate students, took the challenge.  If rates are stuck low, at the short end, then it must be the case of some massive fraud at Treasury.  Because Krugman says we can borrow infinite money at the short end!  And Jack Lew, rather than be accused of fraud, did in fact try to use the short end.  In fact, the debt cartel which manages government debt, wrote memos to Jack, and Jack repeated these memos to Congress. The memo says: 'If Congress wants to manage its debt at .23% rates, then Congress needs to have cash in the account, liquidity. Disputing Krugman's Theory was a big deal in Congress, the finance committee.  They are the ones who are supposed to make this crazy theory true.  And they, the Senate, concluded, correctly, that they cannot do what the Krugman theory says, Congress spent the liquidity!

And the theory of everything proves Krugman wrong because the TOE can compute a very accurate measure of Congressional liquidity as a constrained flow.  That means, Congress needs the  two rate. That is  where the curve matches Brad Delong's linearity.