Like most Keynesians, in the end, Paul Krugman is a one-trick pony who always recommends inflation as the answer to economic problems. (After all, he DID say in The Return of Depression Economics that inflation could provide a "free lunch" during economic downturns. In other words, the printing press negates the Law of Opportunity Cost.)
So, I see that Krugman now is giving the "Vietnam Strategy" to the Europeans: in order to "save" the euro, you must destroy it -- via inflation. Furthermore, we are supposed to think that had the German government in 1930 embarked on a policy of inflation, that it would have "saved" the country. Somehow, I doubt it.
How should the Europeans do it? Krugman already has set out a strategy that marks the way in which the European Central Bank would purchase the short-term debt of countries like Ireland, Portugal, Spain and Greece and hope that in the future, these countries will get their fiscal house in order. (Even Krugman knows that Greece cannot and won't do it, given Greek policies and its bloated government sector. Nonetheless, he believes that maybe the European Central Bank can inflate Greece's problems away, too.)
However, Krugman does not even contemplate any realistic outcomes of his strategy. If the ECB simply acts as the Big Sugar Daddy for countries by purchasing government bonds wily-nily, what is to keep everyone else from joining the Free Lunch? Sure, the European Parliament can enact policies that supposedly will limit this foolishness, but it is doubtful that once the shower of goodies starts, that anyone will hold to fiscal discipline.
In the end, this is a strategy that would inflate the euro out of existence. Now, that might be "good" for the dollar, given that investors around the world holding money are looking for safe havens. But the dollar sucks, too, thanks to the money-pumping strategy of the Obama administration.
So, in the end we are left with blizzards of paper money. But never fear, says Krugman. After all, everyone from Princeton and Washington knows that paper is more valuable than gold because paper is managed by Really Smart People Who Know More Than Everyone Else.
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As much as I hate Krugman, I think he may be right here.
The Euros had a big debt orgy (as did we). It's not going to be paid back in sound Euros (dollars). So the choice is to default or devalue.
I'd propose a step devaluation, and then a return to the gold standard. A new gold standard at $5,000 or $10,000 per ounce would seem to solve a lot of our problems.
I would love to hear your thoughts.
Keynesian "logic":
1. Never call for deflation and always call for inflation.
2. After the economy goes through a boom bust cycle on account of inflation, observe people expecting higher inflation than is justified according to the current quantity of money.
3. Watch people holding out for higher prices, which exacerbates unemployment and idle resources.
4. Say that because there is unemployment and idle resources, more inflation is justified.
5. Go back to step 1.
I would agree that the European Union has been a disaster in many ways, but the thing that has undermined its currency and economy has been the original easy money policy. Krugman seems to be criticizing the EU for engaging in loose policies, but then recommends even LOOSER policies as the cure.
Devaulations are nothing more than governments admitting what everyone else already knows. A devaulation here would not be a cure per se, but rather a step of honesty.
Pete, you need to become a finance minister someplace, as you understand the Keynesian paradigm. And everyone knows that inflation is your friend!
"Devaulations are nothing more than governments admitting what everyone else already knows. A devaulation here would not be a cure per se, but rather a step of honesty. "
I'm not sure how one can get honesty out of fraudulence. Isn't devaluation (when done by anyone but a free market) a form of savings theft? Money manipulation to help one party at the expense of another doesn't seem honest to me.
You are right, or we can say that the conditions that lead to devaluation are a form of theft. Governments will try to quietly play the seigniorage game and when traders catch them, the governments first blame the traders (speculators) and then go ahead and devaluate.
I understand our point about honesty and dishonesty. It is like the kid with his hand in the cookie jar insisting the hand is not there, but he finally and reluctantly admits it. Of course, then he claims that the "cookie speculators" forced him to do it!
Just as Rick Perry imploded this week, so has His Lordship LORD KEYNES. It has never been more clear that he is either unwilling or unable (or both) to understand the basic Austrian concept of economic calculation which he insists only applies to socialist systems without prices.
LK: “The economic calculation debate applies to socialist systems without prices and where all production and consumption is planned centrally.”
To which I responded: “I suppose that is true in the sense that the Keynesians dishonestly wish to avoid debate. The issue of economic calculation is the central issue of the Austrian critique of Keynesian money dilution and is central to the explanation of how distortions of economic calculation caused by Keynesian schemes induce the unsustainable Keynesian boom.”
LK then responded: "That is only true if ABCT is valid. It is not.”
http://tinyurl.com/3gxrqeh
Clearly, LK has things bass-ackwards. Economic calculation must occur if prices are distorted by Keynesian funny money schemes due to Cantillon Effects. How this might play out is deduced from the impairment of economic calculation. The ABCT is deduced from the impairment of economic calculation.
Pete (fka “Major Freedom”) then had the energy to take LK down in more detail. Quite excellent.
Speaking of MMTers, they apparently suddenly realize that they never discuss the real world. Thankfully, there’s a new blog to cure that problem:
A few days ago I checked out the latest stories over at Pragmatic Capitalism, and found a rather insightful comment by an anonymous user.
“So why do the posts and discussions on this forum focus 90% on the unimportant mechanical process and only 10% on the more critical factor – productivity and economic value of government spending?”
The user has a point. The importance of the insights of MMT has little or no impact if we don’t take a rigorous approach to modelling an MMT system and compare it to a mainstream monetary theory model. Often I see the MMT proponents arguing about these mechanical processes, but the real potential of MMT would be to use it to improve monetary and fiscal policies. This can’t be done without modelling, and there is little work being done in this area.
http://www.modernmt.net/2011/08/14/moving-forward-with-modern-monetary-theory/#more-92
Really.
So we're not crazy after all. They've just been arguing their silly "mechanics" points all this time with no comprehension of the real world. I'm holding my breath in anticipation of this "modeling".
At least Krugman's pony has a trick. Your only act is to sit in the audience and criticize the performers. Wow.
The "trick" is that it ultimately makes the depression deeper. What a miracle!
And you are right; the Keynesians are in charge and protect their academic and political territories with intimidation and exclusion.
So, you believe it is wrong to criticize. Then do you believe it is wrong for Krugman to criticize others, or are you so insecure in your Keynesianism that any criticism of the theory scares you?
"Economic calculation must occur if prices are distorted by Keynesian funny money schemes due to Cantillon Effects.
Cantillon Effects on their own constitute no argument against government spending that increases the money supply. If it did, all private sector activity that causes Cantillon Effects would also be unacceptable/immoral:
http://socialdemocracy21stcentury.blogspot.com/2011/09/are-cantillon-effects-argument-against.html
Your arguement then just reduces to
(1) parroting your imaginary trade cycle theory.
(2) complaining that money creation is theft/immoral by a totally discredited natural rights theory that can't overcome Hume's "is" from "ought" problem.
"At least Krugman's pony has a trick. Your only act is to sit in the audience and criticize the performers. Wow."
If the show fits...
In America you are free to do that still.
LK since you are back on troll patrol answer my questions you neglected in the prior post.
What are your solutions to the present environment dominated by:
An insolvent banking system
A central bank filled with toxic waste paper assets backing the worlds reserve currency
25% of homeowners with negative equity and upwards of another 5 -10% near negative
Three years of 0% interest rates and negative effective rates with no recovery
Stimulus games that pulled demand forward but solved nothing
And on and on ...
Please LK, tell us what your wise and powerful economic philosophy can offer as a solution to this tar pit we find ourselves in. Please tell us you can offer something more than "we didn't do enough, red herring, straw man or a laundry list of egghead citations. Please tell us you have something that will work in the real world. Please.
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