Jun. 27th, 2012

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My understanding of economics is so poor that statements that are immediately obvious to some people still contain unbridgeable ellipses for me. But here's a passage from Paul Krugman's End This Depression Now that I think, if I were to reread it five or six times, I may end up understanding. At least I'll post it here for reference. I know this is no substitute for understanding IS-LM curves (on the long-term lol to-do list), but at least it may give me some idea why government borrowing when we're in a liquidity trap doesn't drive up interest rates. (The block quote in the Krugman excerpt is from a May 2009 blog post of his in which he does bring up IS-LM curves.)

Loanable funds )

(Context of this is Niall Ferguson apparently assuming that if the government borrowed there'd be no buyers/lenders, so the Fed would have to do the buying itself, which would drive down the price of government bonds and drive up interest rates by the law of supply and demand, too many bonds and not enough buyers — if I'm understanding the Ferguson passage right [quoted by Krugman on p. 135], which I may not be.)

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Frank Kogan

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