Sunday, December 26, 2010

Krugman: It's Not Inflation Until I Say It's Inflation

So, Paul Krugman finally has taken notice of rising commodity prices, although the price of gold has escaped his notice. (Krugman, of course, is a true gold hater, although I would be interested to know if he has any gold holdings in his own investment portfolio.)

In his most recent column, Krugman claims that rising food and fuel prices are nothing more than evidence of an economic recovery. Nothing else. He writes:
What the commodity markets are telling us is that we’re living in a finite world, in which the rapid growth of emerging economies is placing pressure on limited supplies of raw materials, pushing up their prices. And America is, for the most part, just a bystander in this story.
As for inflation, Krugman claims it is low, but what he means is that the government's Consumer Price Index is not rising by nearly as much as prices are rising for commodities. As I see it, however, the "Scarcity" argument really does not hold much water.

Krugman apparently believes that although the Federal Reserve System has been flooding the world with dollars via bailout loans around the world and an aggressive monetary expansion policy at home, all of those extra dollars really have no effects on prices. Yet, I believe that to be shortsighted, as the commodities markets are extremely sensitive to changes in the value of money.

However, Krugman claims that any dissent from his wisdom is nothing more than right-wing nonsense:
What about commodity prices as a harbinger of inflation? Many commentators on the right have been predicting for years that the Federal Reserve, by printing lots of money — it’s not actually doing that, but that’s the accusation — is setting us up for severe inflation. Stagflation is coming, declared Representative Paul Ryan in February 2009; Glenn Beck has been warning about imminent hyperinflation since 2008.

Yet inflation has remained low. What’s an inflation worrier to do?

One response has been a proliferation of conspiracy theories, of claims that the government is suppressing the truth about rising prices. But lately many on the right have seized on rising commodity prices as proof that they were right all along, as a sign of high overall inflation just around the corner.
Uh, I would say that stagflation (a parallel increase in the rates of inflation and unemployment) already is here, although it is not as pronounced at it was 30 years ago. But since Krugman denies that stagflation is here, then I guess it is not here no matter what the numbers tell us.

As I have said before, people have been too quick with the predictions of hyperinflation and imminent economic collapse, but given that the Obama administration's economic "recovery" program consists of spreading dollars abroad, spending, expanding government regulation, empowering federal prosecutors against business figures, demonizing businesses, continuing costly foreign wars, and expanding an already bloated and abusive "security" apparatus at home, there isn't going to be anything akin to a real recovery.

However, the things I have listed seem to be on Krugman's list of what will bring us into recovery, although I am not sure how any of what I have listed is going to result in more goods being produced and American entrepreneurship being unleashed. But Krugman is too busy creating "Jake Blues" excuses as to why commodity price increases really have nothing at all to do with the state of the U.S. Dollar. (Remember "Jake's" encounter in the sewer tunnel with his jilted lover, played by Carrie Fisher? He gives a litany of excuses, and Krugman takes the cue.)
So what are the implications of the recent rise in commodity prices? It is, as I said, a sign that we’re living in a finite world, one in which resource constraints are becoming increasingly binding. This won’t bring an end to economic growth, let alone a descent into Mad Max-style collapse. It will require that we gradually change the way we live, adapting our economy and our lifestyles to the reality of more expensive resources.

But that’s for the future. Right now, rising commodity prices are basically the result of global recovery. They have no bearing, one way or another, on U.S. monetary policy. For this is a global story; at a fundamental level, it’s not about us.
I don't think so. Resources have not suddenly become finite; the Law of Scarcity did not come about yesterday. To deny ANY relationship between the surge in commodity prices (including gold and silver, Paul) and the dollar losing value is to deny reality. But Krugman is good at denying reality -- and demonizing anyone who disagrees with his Great Wisdom.

32 comments:

Lord Keynes said...

Krugman claims that rising food and fuel prices are nothing more than evidence of an economic recovery. Nothing else

Did you even bother to read his column properly??
Krugman actual words:
“… thanks to growth in developing nations, world industrial production recently passed its previous peak — and, sure enough, commodity prices are surging again …. Nor should we reject the notion that speculation is playing some role in current prices; for example, who is that mystery investor who has bought up much of the world’s copper supply? But the fact that world economic recovery has also brought a recovery in commodity prices strongly suggests that recent price fluctuations mainly reflect fundamental factors.”

Get it?
(1) Developing nations, (2) global demand and (3) some speculation are playing a role in commodity prices. Your straw man sentence above is a caricature.

As I have said before, people have been too quick with the predictions of hyperinflation and imminent economic collapse, but given that the Obama administration's economic "recovery" program consists of spreading dollars abroad, spending, expanding government regulation, empowering federal prosecutors against business figures, demonizing businesses, continuing costly foreign wars, and expanding an already bloated and abusive "security" apparatus at home, there isn't going to be anything akin to a real recovery.

And with no real recovery the economy will be gripped by deflationary forces?
Also, ever heard of debt deflation?

Lord Keynes said...

But Krugman is too busy creating "Jake Blues" excuses as to why commodity price increases really have nothing at all to do with the state of the U.S. Dollar.

And what is the state of the US dollar? Under George W. Bush it depreciated significantly, as you can see here:

http://research.stlouisfed.org/fred2/series/TWEXB

Then its value surged in late 2008/early 2009. It fell again in 2009, but then surged again in late 2009/early 2010, with a fall again in late 2010.
Today it is higher than it was in early 2008 before the crisis hit and before Bernanke’s quantitative easing.

Also, the Federal Reserve trade weighted US dollar index and John Williams’s ShadowStats Financial-weighted Dollar index show that the US dollar is today not much below its value between 1991-1996:

http://www.shadowstats.com/alternate_data/dollar-index-charts


Is this supposed to be a sign of imminent high inflation or hyperinflation?

Rick T. said...

LK: The value of the dollar, and pound, and euro, and every other paper currency, continues to plummet versus the only currencies that lack a central bank or any way to conjure more into existence out of thin air, namely gold and silver. When the central bank of the Euro counterfeits its currency at a faster rate than we counterfeit the dollar, then that makes the dollar relatively stronger. But people are increasingly trading in all their fiat currencies for the honest ones.

It may not bother you today that gold is increasingly out of your reach. The fact that the central banks have not yet completely destroyed confidence in their fiat currencies doesn't mean that they aren't heading down that path and may get there one day.

Anonymous said...

If your theory is correct, why did commodities drop sharply when the dollar was rising in mid 2008?

William L. Anderson said...

Yes, according to Keynesians, there really is no connection between the value of money and relative prices. Krugman is claiming that commodity prices really are irrelevant and that they have no connection to the value of money.

As for money, Keynesians believe that it is nothing more than a quantity variable, just as they believe that all factors of production are homogeneous, and all that is needed to create prosperity is for government to inject more spending. For that matter, even their term "spending" conjures up a pure quantity concept, as they assume that we "spend" not for the purposes of meeting individual needs, but for a vague purpose of spurring on that amorphous mass known as an "economy."

the anti-krugtard said...

All hail the Krugtard!

Mike M said...

LK, the trade weighted dollar index is a measurement of one flawed monetary abstraction against a basket of flawed monetary abstractions. Since the USD is the reserve currency it gets to be the cream of the crap. Measure the USD against real money, gold, and you see a different chart. Then again you don’t think gold is money so never mind.

LK you and Krugman fail to accept that rising commodity prices can be the byproduct of multiple variables, developing nation demand AND currency debasement etc. I assume Anderson accepts this but don’t know.

Anonymous, commodities dropped in mid late 2008 because anything that could get a bid was sold during the liquidity crises and converted to dollars which increased its demand. The moment has passed, the trend line resumes.

I disagree with Krugman’s implication and attempt to marginalize critics of the government alleging conspiracies about inflation. I also disagree with those who allege a conspiracy. The manipulation of the statistics by the BLS is right there for all to see if you do the digging. Exponential weighting, substitution, hedonic adjustments etc. I said this before. CPI is a political statistic not an economic statistic.

AP Lerner said...

Sorry, but until you can settle your tax burden and buy food at Wal Mart with it, gold is not money. The only thing the run up in gold proves is Maddoff did not find every fool in the world for his ponzi scheme.

And sorry but yes the Fed is a disaster and the policies coming out of the Obama administration have done more harm than good but please put your neo liberal text books down and pay attention to the real world. Disinflation is real. Just take 5 minutes and read the earnings reports of Wal Mart, Kroger and other grocers. The have zero pricing power. Higher commodity prices does not equal inflation except only to ideologues and Austrians and it's simple minded to claim so. It's called a margin squeeze and demand destruction, not inflation. An astute analyst recognizes this. Academics touting theories and laws will not.

Heres a hint. The balance sheet recession continues.

Rick T. said...

AP Lerner: I normally disagree with your posts, but I think you are correct about the balance sheet recession. Not that I am an expert in it, but I don't think there is anything in Austrian theory that says that the world economic system can't be overloaded with debt, which it is certainly is now. That isn't an inherent consequence of free markets; it is actually a consequence of stupid government policies.

What caused the excess debt? It comes from the government specifically creating incentives for businesses to finance with debt rather than equity, in the form of a tax deduction for interest payments and no such deduction for dividend payments. It comes from the government, paid off by the housing and banking industries, pushing people into buying houses rather than renting, in the form of tax deductions for interest expense and local real estate taxes, along with the Fannie Mae et al cheap guarantees.

It also comes from governments intentionally debasing their currencies by spending more than they take in and either giving the money to the politically connected or wasting the money on things that have no economic value. Combine that with central banks keeping interest rates too low, and you have tremendous incentives for people to trade in their dollars, euros, etc. for ownership of houses, companies, etc., that are going up in value against the depreciating currency. In a government generated asset inflation, it makes sense to buy things with your own money, and it makes even more sense to borrow money to buy even more things.

Without both the governments of the world and the central banks puffing up successive bubbles, we wouldn't be overloaded with debt the way we are. Yes, liquidation of the debt is a strong deflationary force, and may be more powerful than the desperate attempts of the governments and central banks to create more inflation. Most likely, we will get the worst of both worlds: everything most people need, like food and energy, will go up in price, while the stuff they own against which there is debt, like houses, continue to shrink in value.

Why you think chartalist solutions will either make matters better or prevent it from happening again, is beyond me. A free market system, without the government and central banks blowing bubbles, and gold and/or silver based currencies that can't be counterfeited because they don't come with central banks, would have prevented the problem. That should be our goal; it won't be easy to get there from here, but it can be done.

Mike M said...

AP you comment fails to distinguish between Money (gold), Money Substitute (a claim on gold, which is what the USD used to be) and Modern Fiat Currency (floating abstractions). Your dismissal of gold as a Ponzi phenomenon ignores 2,000 years of history. Perhaps you think its “different this time”

My clients are involved in multiple aspects of commerce. The pricing pressures are working their way through the system in different ways. The manifestation via prices is coming. If you look, you can see it now in non-price ways. But if you only accept government issued CPI as inflation, you will be blind to it.

I will say the Austrians are right on one aspect of things. That is, the frustration of the Austrian crowd is things take longer to materialize than they should in their mind, however they make up for it by being more severe in nature.

Mike M said...

Rick T

Well stated.

jason h said...

The only thing the run up in gold proves is Maddoff did not find every fool in the world for his ponzi scheme.

Yep, all us crazy Austrians are buying so much gold they can hardly dig it up fast enough.

Except most gold is bought and sold by central banks. The Glen Beck Fan Club isn't driving up the price of gold...try again.

jason h said...

Sorry, but until you can settle your tax burden and buy food at Wal Mart with it, gold is not money

Austrians have covered this one as well. 'Bad' money drives out 'Good' money. If the grocer or the tax man will accept counterfeit paper, why the heck would I give him real money.

People could buy a stick of gum with a silver quarter, but the store also accepts the nickel plated crap.

Bob Roddis said...

I'm always astonished that after the Keynesians and their funny money have ignited an economic Armageddon, it's our fault if we can't precisely predict whether the collapse is going to be accompanied by deflation or inflation.

It's like after they nuked us, we're terrible people because we can't predict if we're going to die from starvation or radiation poisoning.

AP Lerner said...

'My clients are involved in multiple aspects of commerce. The pricing pressures are working their way through the system in different ways. The manifestation via prices is coming.'

Let me know when your clients can pass along those increased input costs to their customers. Until then, it's like I said: a margin squeeze. The disinflation continues.

Mike M said...

AP you don’t seem to understand. Price alone is not the only evidence of inflation. Many of these clients have tried to maintain their margin in other ways in advance of being comfortable raising prices.
Lesser quality products, reduced service to customers, smaller quantities in packages but same price, exempt employees working more for same pay, etc. These are all non price manifestations of inflation of input costs while a company tries to maintain margins. If you pay attention to your own personal commerce experiences you will see this evidence. Then again if you only accept the political definition of inflation, then you see nothing.

Lord Keynes said...

The value of the dollar, and pound, and euro, and every other paper currency, continues to plummet versus the only currencies that lack a central bank or any way to conjure more into existence out of thin air, namely gold and silver.


Measure the USD against real money, gold, and you see a different chart.

Yes, the value of gold fell against fiat currencies for most of the 20th century, including an almost 40 year bear market from 1934-1972:

http://inflationdata.com/inflation/images/charts/Gold/Gold_inflation_chart.htm

There have been 2 spikes: the biggest one from 1973-1980 (larger than the present one), which was followed by a 20 year bear market.

The latest one started in 2001. If you want to talk about bubbles, talk about gold.

Richard M said...

LK,

Right LK. The reason the Gold Standards, the Gold Exchange Standard, the Bretton Woods System, and the Smithsonian Agreement all failed was because 'paper' became more valuable than gold.

Bob Roddis said...

Not holding my breath for:

1. The statists to explain where all the stuff is going to come from to satisfy all of this unpayable debt (and isn't it odd that they continue to meticulously IGNORE this central issue that we raise almost daily?).

2. The statists to explain how funny money creation does not fatally impair economic calculation (and isn't it odd that they continue to meticulously IGNORE this even more central Austrian issue of economic calculation??).

Lord Keynes said...

The statists to explain where all the stuff is going to come from to satisfy all of this unpayable debt

What? The money to pay back government debt?
Once the economy is properly stimulated back into full employment growth, the deficit disappears and you get budget surpluses - with which you pay down debt.

The statists to explain how funny money creation does not fatally impair economic calculation

Because ABCT is rubbish, and "funny money" a ridiculous loaded term.

And Austrians are clueless on the dynamics of debt deflation.

On money supply they are also clueless.

Take a look at the figures from John William' Shadowstats:

http://www.shadowstats.com/alternate_data/money-supply-charts

M3 (the broadest measure of the US money supply), which Shadowstats continues to estimate, is contracting, and has been sense late 2009.
So which Austrians are even capable of reporting the fact that there is deflation of M3?

AP Lerner said...

'Lesser quality products, reduced service to customers, smaller quantities in packages but same price, exempt employees working more for same pay, etc'

Yup. That's called deflation. You kind of made my point of disinflation for me. Thanks.

Bob Roddis said...

Yup. That's called deflation.

No. Getting less for the same amount of money is INFLATION. I'm going to beat this horse for months. Count on it. We're never gonna let this one go!

Also, I'm glad LK clarified once and for all his magic beans theory of funny money economics explaining where the stuff is going come from to satisfy the unpayable debt. The funny money will create TRACTION which will spur miraculous creative activity (just like Prof. A says daily!)

LK (and all the statists) continue to ignore the CORE issue of economic calculation which precedes every aspect of economic analysis.

Bob Roddis said...

Robert Wenzel linked to some Turkish Austrians (I like the way that sounds) who explain that the boom/bust cycle induced by funny money creation will generally cause metals to be more volitile than the CPI:

"The fact that CPI is not acting as a leading indicator during business cycles is well illustrated by the trends given in figure 4. Therefore, it would be more appropriate to take real-estate, industrial-inputs, energy, and metal prices as indicators of economic risk."

http://mises.org/daily/4072

and

http://tinyurl.com/24f557h

I like to use the term "funny money" because, well, funny money is kinda funny. And criminal and fraudulent and poverty inducing. And morally depraved. And a form of massive theft. I'm sure I can think of even more of its fine qualities later.

Rick T. said...

Bob Roddis: Don't feel like you have to justify the term "funny money." There is counterfeiting of the dollar (and most of the other fiat currencies) going on, not (or not only) by sleazy people in basements with printing presses, but mainly by sleazy people in the central banks with printing presses. In both cases money gets created without any work in excess of consumption that the ownership of money is meant to represent. Buying power is created, but no supply of goods and services that people want is created. Whether they have to pay higher inflationary prices due to the new competition from others with counterfeit currency, or they don't buy and let others take advantage of their production, people who create real wealth are cheated by this process. Keynesians and chartalists think that it is both OK to cheat people, and they won't notice anyway, but it is not and they do.

Because they do, the Fed's money printing is becoming self defeating. The Fed comes up with QE2 to supposedly help the economy, but holders of dollars see all this counterfeit money being created, and turn in their dollars for commodities and other assets. So the prices of energy and food go up. Given that those are essentials for most people, even though they don't count in the core CPI, people have less to spend on other things, and the economy gets weaker, core CPI shows a decline, and the Fed responds with even more counterfeiting.

Sorry AP Lerner and LK, but people are on to your scams, and they are not working anymore.

Lord Keynes said...

The Fed comes up with QE2 to supposedly help the economy, but holders of dollars see all this counterfeit money being created, and turn in their dollars for commodities and other assets. So the prices of energy and food go up.

Except this is rubbish.
If "holders of dollars" really want to dispense with US dollars, then they wouldn't re-sell the commodities/assets they bought for US dollars in the secondary markets.
Yet that is exactly what's happening in the commodities markets.

The dollar's value would have crashed to nothing by now.
Instead, the US dollar has seen 2 large surges in its value since 2008.

Bob Roddis said...

As AP Lerner always reminds us, having the government declare funny money to be legal tender and what you must use to pay your taxes can provide the funny money with some value among an oblivious populace.

And I agree that to a certain extent, he is correct.

I really don't see how the fact that the populace has accepted depreciating funny money as real money has any relevance to the fact that it causes the boom/bust cycle. If the populace wasn't oblivious, they wouldn't use it, they would demand real money and there wouldn't be a boom/bust cycle.

Got it?

Rick T. said...

LK: "Except this is rubbish.
If "holders of dollars" really want to dispense with US dollars, then they wouldn't re-sell the commodities/assets they bought for US dollars in the secondary markets."

You are saying that, because there are markets for commodities, every time there is a trade there is someone selling as well as someone buying? And that therefore the fact that commodities have been going up in price against the dollar has no meaning? So prices convey no information about what is under increased or reduced demand or supply? Surely you jest.

There is a limit of how much oil or corn one can own in an attempt to get rid of fiat currencies. So we have seen massive turn ins of paper for other assets like the stock market (ownership of companies) and high end art. There are only a limited number of Rembrandts, as there is only a limited amount of gold or shares of Google, but an increasingly unlimited amount of dollars, euros, etc. Understand the concept yet?

"The dollar's value would have crashed to nothing by now.
Instead, the US dollar has seen 2 large surges in its value since 2008."

Not against gold and silver it hasn't. Against other currencies whose central banks are also counterfeiting, sure, from time to time one is acting worse than the next and people want the less bad one, which will vary.

Anonymous said...

AP Lerner, I am shocked by the obvious error you made.

Getting lower quality goods for the same price is inflation, because consumers resist price rises less when it comes in the form of lower quality.

For an intelligent person, you have made a terrible terrible blunder.

AP Lerner said...

So, just to clarify, stagnant wages are inflationary? That's odd.

Mike M said...

AP said: “Yup. That's called deflation. You kind of made my point of disinflation for me. Thanks.”
So let me see if I have this straight. You think paying the same but getting lesser quality is disinflation? I am going to extend a holiday gift to you and assume that you made that statement under the influence of festive spirits.

MIke M said...

AP: OK I will explain it to you. If I am working more but being paid the same, my cost of living has risen. I must work more to maintain the same standard of living. Now I can understand how that can be translated into a de facto wage cut thus “deflationary”, however it is in fact a higher cost of living. That is what the true inflation effect is supposed to be. What is takes to maintain a cost of living on a static basis not some political calculation called CPI.

jason h said...

Exactly Mike M. And this is how Keynes designed it. Quantitative easing is meant to keep nominal wages the same while lowering real wages. Ultimately stealing productivity from those forced to hold funny money.