Here’s Paul Krugman:
Ah. In this afternoon’s Reddit, I was asked how the Fed can help the Emperor Diocletian escape the zero lower bound. My answer, I realized later, missed a crucial aspect of the situation: the ancient Roman economy could not have trouble with the zero lower bound, because the Romans didn’t have the concept of zero. They had to set the
FedImperial funds rate at LXXV basis points, or whatever.
It wasn’t until the Arabs invented Arabic numerals that the liquidity trap became a possibility.
I guess I’d have to admit that overall Krugman is a better monetary economist than Diocletian. But the famous Emperor does have Paul beat in one area—the zero lower bound. The real reason that Diocletian never got stuck in a liquidity trap is that he wasn’t a Keynesian. Only Keynesian policymakers get stuck at the zero bound. Monetarists don’t get stuck, because there’s no upper limit on the money supply. And decadent Roman Emperors never get stuck because there’s no zero lower bound to the amount of metal in a coin. That’s because if the amount of metal fell to zero, it would no longer be a coin! More seriously, there is no plausible lower bound on the amount of precious metal in a high-valued coin. Does anyone serious dispute that a 99.99% reduction of the amount of gold in a $20 dollar gold piece would have been inflationary in 1933? After all, even a 40% reduction turned out to be highly inflationary.
Krugman was way ahead of the profession in 1998 when he emphasized that monetary policy wasn’t about the current setting of the policy instrument, but rather the expected future path. But he didn’t take that far enough. That implies that the current instrument setting is primarily a signaling device. And that means you really need an instrument that doesn’t become mute when you most need it to speak loud and clear. In other words, nominal interest rates are the worst possible instrument. Even the FDR/Diocletian instrument (coinage debasement) would be far superior. Krugman’s a great monetary economist, but he has an unhealthy obsession with using interest rates as a policy instrument.
John Locke was already way ahead of Paul Krugman in 1694:
“For I think no body can be so senseless, as to imagine, that 19 Grains or Ounces of Silver can be raised to the Value of 20; or that 19 Grains or Ounces of Silver shall at the same time exchange for, or buy as much Corn, Oyl, or Wine as 20; which is to raise it to the Value of 20. For if 19 Ounces of Silver can be worth 20 Ounces of Silver, or pay for as much of any other Commodity, then 18, 10, or 1 Ounce may do the same. . . . And so a single Threepence, or a single Penny, being call’d a Crown, will buy as much Spice or Silk, or any other Commodity, as a Crown-piece, which contains 20 or 60 times as much Silver; which is an Absurdity so great, That I think no body will want eyes to see, and Sense to disown.”
No “absurdity so great?” John Locke never met a Keynesian.
PS. Actually Locke must have met some Keynesians–as he was pushing back against claims that currency depreciation wouldn’t be inflationary.