Krugman: Appeasing the Bond gods

http://www.nytimes.com/2010/08/20/opinion/20krugman.html?th&emc=th
Paul Krugman writes in the New York Times:

"...the policy elite — central bankers, finance ministers, politicians who pose as defenders of fiscal virtue — are acting like the priests of some ancient cult, demanding that we engage in human sacrifices to appease the anger of invisible gods.


"Skeptics pointed out that slashing spending in a depressed economy does little to improve long-run budget prospects, and may actually make them worse by depressing economic growth. But the apostles of austerity — sometimes referred to as “austerians” — brushed aside all attempts to do the math. Never mind the numbers, they declared: immediate spending cuts were needed to ward off the “bond vigilantes,” investors who would pull the plug on spendthrift governments, driving up their borrowing costs and precipitating a crisis..."

The fallacy that economic growth will stem from budget cuts is already being demonstrated in Greece, where austerity measures are now resulting in a contracting economy.

To repeat: Austerity in Greece isn't producing growth, its producing contraction!

The Austrian economists and the bond vigilantes are simply wrong on this logic that smaller deficits produces bigger growth.

Their error is to believe that government debt makes less money available for private business.

This is simply not true. Marshall Auberback and Randall Wray have very convincingly demonstrated that government budgets and finance are NOT like household budgets and finances.

As the sovereign, government can always produce more currency. It does not have to borrow it unless the government doesn't control its own money supply, as is the case in the European Union monetary system.

However, I do agree with Ellen Brown that the semi-private federal reserve system ought to be replaced by a fully public central bank. This move would allow the government to offer even lower interest rates to borrowers, as demonstrated by the capacity of the public bank of North Dakota.