No, We Can’t Run Out of Money

The Krugman (boldface mine):

Remember, Britain has its own currency, which means that it can’t run out of cash. Furthermore, the short-term interest rate is set by the Bank of England. And the long-term rate, to a first approximation, is a weighted average of expected future short-term rates. Unless markets believe that Britain is going to default — which it isn’t, and they won’t — this is more or less an arbitrage condition that ties down the long run rate no matter what happens to confidence. Or to be a bit more precise, it’s hard to see what would drive up long rates except a belief that the BoE will raise short rates; and why would it do that unless it sees economic recovery in prospect?

Now, a loss of confidence in Britain’s prospects could move other prices. In particular, it could lead to a weaker pound. But that would be a good thing from Britain’s point of view, just as the weakened yen is good news for Japan.

I’m sure Krugman has thought this for a long time (I have no reason to think otherwise), but there was no way five years ago anyone in a mainstream forum could write this and not be pilloried. Maybe some thanks to the wackaloon MMTers are in order?

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