As a Keynesian, Krugman has embraced the price theory of his predecessors, that being the belief that "price" is the "P" on the y-axis of the Aggregate Demand -- Aggregate Supply graph. (It is hard to know that the "Y" -- Or is it "Q"? -- might be on the x-axis, given that GDP, or Y, is monetary-based and one cannot have the same thing on both axes. Likewise, an AS-AD graph cannot be logically configured to have just "physical output" on the x-axis, either. What's a Keynesian to do?)
Thus, "price" in the Krugmanian viewpoint is a statistic created by government, and it receives its meaning only as part of a state-configured weighted average. However, when it suits him, "price" suddenly can have all sorts of important meanings -- that is, something that supports his viewpoints.
Likewise, Krugman like many other "elite" academics has utter contempt for anything that smacks of the "market." In the academic world, as well as the world of mainstream/leftist journalism, markets are little more than evil creations made by those who wish to get rich on the backs of "the people." And "price theory"? Fuggediboutit, except when "markets" seem to affirm their position.
One of Krugman's constant themes is that there is very, very little inflation in our economy today. Rising fuel and food prices? Why that is just aggregate demand from abroad. QE1, QE2, and QE-in-perpetuity has nothing to do with that phenomenon, and anyone who claims differently does so because he or she is a racist or an Obama-hater (which means the person is a racist).
Why is this true, according to Krugman? Government bond prices. You see, if interest on U.S. Government bonds is low and prices high, then that is PROOF that there is no inflation. In other words, if he can spin a price into something that backs up his claim, then Krugman suddenly becomes Murray Rothbard in claiming that individual prices really do matter.
One thing that Krugman does not point out is that the ratings agencies have given U.S. Government debt their AAA ratings, but the rules applied to the government are different than rules applied elsewhere. I say this because the vast majority of U.S. Government debt (held in six-month T-bills) is repaid with more debt.
No other entity can get away with this. When New York City in 1975 secretly was selling bonds to pay back its previous bonds, the market ultimately revolted and the city had a financial crisis. In fact, what NYC did was illegal, and those behind it were committing criminal fraud, but because of their political connections, no charges were brought.
(Interestingly, the NY Times, which endlessly calls for criminal prosecutions against those alleged to have committed financial fraud, supported this fraud and the fraudsters. So much for the Grey Lady's consistency on criminal justice.)
As I see it, the AAA ratings from S&P and elsewhere are political in nature, and are not the result of any kind of careful -- and honest -- financial analysis. If any of the agencies were to downgrade U.S. Government debt, with its payment scheme of Rob-Peter-to-Pay-Paul, the government would be hauling executives from those firms into prison to join Bradley Manning. Don't kid yourselves on that; anyone who believes that an intimidation factor is not in play here does not understand the thuggery of the U.S. Government.
Yes, the government has declared that ONLY the U.S. Government can pay back bonds by selling other bonds, and as long as Congress raises the debt ceiling, some people believe this charade can go on forever. However, at some point, the real market will revolt against this fraudulent scheme. Yes, I am sure the Federal Reserve System will try to come to the rescue, but the Law of Scarcity will expose anything that Bernanke and company might try to do.
Peter Schiff makes a good point in this article, noting that the rating agencies are banking on the Fed's ties to the virtual printing press. He also notes that the ratings agencies were willing to hang onto the AAA ratings for a lot of mortgage paper that the market ultimately exposed to be worthless. Again, because of the political implications of the housing boom, I am sure that S&P, Moody's and others believed it to be in their best interests to pretend that mortgage bonds were sound investments.
And one can bet that at that point, Krugman will rise up and condemn the very market that he now claims provides "proof" that we have very low inflation and that government borrowing and spending is not out of control.