But Who Will Buy The Bonds?

Austerity measures aren’t working very well in Greece, as the Greek economy appears to be slipping into deeper depression and social unrest (whipped up by still-recalcitrant union leadership) is looming.  In the United States, many liberals are using the Greek example to renew former economist Paul Krugman’s vociferous demands for another, larger “stimulus” bill.

The demand is popular among many liberals who see it as necessary to create demand as a prerequisite for economic recovery.   The idea is that if the government pumps out enough money in infrastructure development, aid to state and local government, and other public works projects, then the resulting influx of jobs and cash will cause people to spend more, which in turn will cause private-sector producers to produce more, hire more, and expand.  The “multiplying effect” would ripple  through the economy, pulling it up by its bootstraps.

It’s a tempting scenario, if only you avoid asking a few very important questions that the Krugmans of the world will seemingly do anything to avoid talking about.  The most important question is: where will the money come from?  The government is already running historically unprecedented deficits and, given the skyrocketing demands of Social Security and Medicare as the massive “baby boom” generation retires and demands its piece of the federal trough by any means necessary, these deficits seem certain to grow even further even without endless rounds of new massive new government spending programs (Japan chased this kind of “stimulus” for over a decade starting in the 1990s).

These deficits are funded by selling government bonds to large banks throughout the world.  In recent years, China has become an increasingly large purchaser.  But it is unclear who would buy trillions of dollars of more bonds to fund the Keynesian dream of “demand stimulus”.  China is already sending out flashing warning lights that it is at its limit of willingness to pump money into the U.S. economy and, even if it wanted to, it lacks the trillions of additional dollars of liquid assets to fund a massive Keynesian stimulus.

So who will buy the bonds?

Until they stop shoving that question away, Krugman and the demand-siders are difficult to take seriously even in light of the continuing Greek meltdown.  They rant and rave and foam about how evil and horrible Republicans are, but they never talk about the one serious question directed towards them.  Without a buyer for the bonds, there is no scenario where the demand-side “stimulus” works.  If the U.S. government sells the new bonds at a higher interest rate to try to draw in new investors, that only sucks away investment capital from elsewhere in the economy and chokes the “stimulus” in its crib.  It also raises the cost of all existing debt, pushing the U.S. government deeper into insolvency and making U.S. consumers even less likely to spend.

Alternatively, the Federal Reserve can just sell bonds to itself.  This is the post-modern method of just printing new money.  But there is good reason Krugman and his comrades don’t talk much about this option.  The result would be to debase T-Bills as a whole, making even existing debt (which has to be “rolled over” and re-issued very frequently, sometimes every few months) more expensive to service.  Once again, the result is a cycle of destroying government’s ability to maintain its existing level of operations, let alone “stimulate” the economy.

Maybe there is a “magic bullet” that Krugman and other liberal economists know about, but if so, they have been hiding the ball with remarkable efficiency but no apparent reason.

It’s time for them to put up.