Another Baker Bizarrity

Dean Baker, over at Beat The Press, has come out with his strangest essay yet to beat up on economists in this country. This one is even more bizarre than the one where he claimed that there was no labor shortage in Germany because all they had to do was keep raising wages until workers showed up, and then said at the end that parking lots and hotels would have “some trouble hiring workers” because everyone would be working in the higher paying jobs and not available for those jobs. That certainly sounds like a labor shortage to me, and I'll bet it does to the owners of those parking lots and hotels.

This one was triggered by a New York Times article regarding China raising the banking reserve requirement to curb inflation, and he begins by saying,

U.S. economists seem to not understand that central banks can raise reserve requirements as way to control inflation. This is apparently the reason they find it inconceivable that the Fed could buy and hold large amounts of debt without leading to inflation.

Increasing the reserve requirement means that banks hold on to more money, that they do not lend it, that they keep it out of circulation. That reduces the amount of money that is circulating and it therefor reduces inflation, which is the specific and only reason for doing it.

Buying government debt may be done for any number of reasons, but it is frequently bad news. A government buys its own debt, for instance, when nobody else will do so and that causes interest on that debt to increase because it becomes seen as risky debt. That would not apply to US debt.

The other reason for buying our own debt is when we are issuing new debt to increase the money supply, and that is seriously inflationary. We have been doing some of that, and we have been buying some of that new debt.
I don’t know how much we have been issuing nor how much we have been buying, and it's not really pertinent here.

What Baker wants us to do is buy existing debt held by others and hold it so that we are paying interest on that debt to ourselves, and I have no doubt that is a fine idea. There are just a couple of problems with his suggestion.

How did his plug for buying debt to reduce interest cost and control the deficit arise from an article about China reducing the money supply to control inflation? And where do we get the money to buy the debt? Holding our own debt would not be inflationary in itself, but issuing new money to buy it certainly would be.