I keep hoping that Mitt Romney is a closet Keynesian, but Kevin Drum points out that in response to a donor question about fiscal policy he offfered a behind-closed-doors response that seems to call for both fiscal austerity and tight money:
Romney: Yeah, it's interesting... the former head of Goldman Sachs, John Whitehead, was also the former head of the New York Federal Reserve. And I met with him, and he said as soon as the Fed stops buying all the debt that we're issuing—which they've been doing, the Fed's buying like three-quarters of the debt that America issues. He said, once that's over, he said we're going to have a failed Treasury auction, interest rates are going to have to go up. We're living in this borrowed fantasy world, where the government keeps on borrowing money. You know, we borrow this extra trillion a year, we wonder who's loaning us the trillion? The Chinese aren't loaning us anymore. The Russians aren't loaning it to us anymore. So who's giving us the trillion? And the answer is we're just making it up. The Federal Reserve is just taking it and saying, "Here, we're giving it.' It's just made up money, and this does not augur well for our economic future.
You hear this kind of thing about foreign borrowing from politicians all the time, but you might think that one of the benefits of having a career finance guy run for office would be that he would know better. But this is a farrago of nonsense.
It's all "made up money" and that has nothing to do with the budget deficit or Quantitative Easing or the rest. It's fiat money. I promise you. And it was even back in the good old days of the Gipper. People who had no problem with this five years ago seem to have become very panicked about it recently even though there's been no inflation. I'm not sure I understand what the problem is.
The foreign debts, meanwhile, isn't really a fiscal issue either. The dollar is the cornerstone of the global economy. That means foreigners need to hold safe liquid dollar-denominated financial assets to conduct their transactions. Treasury debt is convenient, but mortgage backed securities and other instruments have also been known to serve. This is a lucky thing for the United States since it allows us to run a trade deficit—we consumer more stuff than we produce—though at a time of depressed aggregate demand it can be a source of trouble on the employment front. But this is the very same thing Romney is complaining about when he complains about Chinese "currency manipulation."