Friday, April 29, 2011

All is well -- on the inflation front! (If you like inflation)

At the end of "Animal House," there is a scene in which the character played by Kevin Bacon is "assuring" the panicked crowd that "ALL IS WELL!"

I make that point because every time I read something from Paul Krugman or someone claiming the Federal Reserve System is being too tight with money and that there really hardly any inflation at all, I think of Kevin Bacon's "Animal House" character. With the price of food, fuel, and consumer goods skyrocketing, the notion that the massive Ben Bernanke "experiment" of showering the world with dollars has had almost no effect on oil and food prices really is a joke.

But, the joke is on us, if Krugman is to be believed. Fuel prices? Food prices? Oh, they're volatile, so we pay no attention to them. In reading Krugman's column today on "The Intimidated Fed," I must admit that his explanation of higher oil and gasoline prices smacks of Jake Blue's excuses when faced with his jilted fiance (played by Carrie Fisher) who is pointing a machine gun at him:

Actually, according to Krugman, it is Ron Paul's fault:
What’s going on here? My interpretation is that Mr. Bernanke is allowing himself to be bullied by the inflationistas: the people who keep seeing runaway inflation just around the corner and are undeterred by the fact that they keep on being wrong.

Lately the inflationistas have seized on rising oil prices as evidence in their favor, even though — as Mr. Bernanke himself pointed out — these prices have nothing to do with Fed policy. The way oil prices are coloring the discussion led the economist Tim Duy to suggest, sarcastically, that basic Fed policy is now to do nothing about unemployment “because some people in the Middle East are seeking democracy.” (emphasis added)

But I’d put it differently. I’d say that the Fed’s policy is to do nothing about unemployment because Ron Paul is now the chairman of the House subcommittee on monetary policy. (emphasis added)

So much for the Fed’s independence. And so much for the future of America’s increasingly desperate jobless.
Let's see. Oil sold on international markets is traded in U.S. dollars, and the Fed is deliberately trying to weaken the dollar through monetary expansion, and there is no relationship between the two policies and what is happening to oil prices?

Belushi! Thou shouldst be living at this hour! Krugman hath need of thee!

Actually, claiming that Ron Paul is really responsible for people wondering out loud of there just might be a connection between the rise of commodity prices and the Fed's massive monetary expansion honors Rep. Paul too much. (Not that Krugman is honoring him; Krugman has come to condemn Paul, not to praise him.)

The idea that Ron Paul is "intimidating" anyone really is a pathetic joke. During sessions of the House Subcommittee on Monetary Policy, the Democrats act as if they are playing their own version of "Animal House," complete with staged walkouts. (And, no, Rep. Paul does not play the Dean Wormer role and yell at the departing Democrats, "You're finished here at Faber!")

Now, if Krugman has any guts at all, he could be calling for the ultimate marriage of "monetary and fiscal" policies: Have the Fed purchase short-term T-bills directly from the U.S. Department of the Treasury. (The Federal Reserve Act of 1913 outlaws such actions, but all it takes to change the law or get around its provisions is a stroke of the pen, right? Obama already has been making "signing statements" in which he says he doesn't have to follow Congressional directives, so why not end this prohibition with a simple executive order?)

You see, should Krugman believe that they way to eliminate high rates of unemployment is through massive new government spending, why not go whole hog? Let the Fed just finance ALL government borrowing this way. I'm sure that "America's increasingly desperate jobless" would appreciate being hired as street sweepers to sweep up all of the dollar bills lying in the gutter!


Anonymous said...

Bob Roddis said...

I give Ron Paul and the Austrians lots of credit. They have made the Keynesians become explicit about what their theories are:

1. That there is a bizarre and other-worldly universe of “macro” where normal forms of logic and economics do not apply.

2. That “the printing money” by the Ben Bernank causes prosperity.

3. That massive unpayable government debt to finance massive spending programs causes prosperity.

Only a noodle-brain Keynesian would believe such nonsense. Average people will reject it every time and they are doing that. Our role is to demonstrate to average people that the Keynesians’ BS line of “this is too complicated for you to understand” crap is just that, crap.

We are NEVER going to reach the little minds of the Keynesians but we have a great opportunity to turn the masses against the Keynesians as the creators of their misery.

Eric in Texas said...

You'll love this link. The name "Paul Krugman" gets mentioned at a town hall meeting. I won't ruin the rest.

Will said...

Would targeting NGDP, like Hayek suggests, lead to less inflation than targeting unemployment like Keynes suggests?

Will said...

Or is the difference government spending vs. monetary policy?

Anonymous said...

Will, the fed can target any NGDP number they want. Scott Sumner suggests about 5%, Bill Woolsey suggests 3%, and Hayek suggests 0%. Japan has more or less been targeting 0% nominal gdp and have been experiencing deflation. A 3% target would probably lead to a stable price level. 5% NGDP level is what the current Fed has been reaching in what's been called the Great Moderation in the past 20 years or so.

Anonymous said...

So now that we have a little hindsight, it appears Krugman was right and you were wrong. Inflation is low and has stayed low and is expected to continue to be low by everyone but Austrians who simply believe (dogmatically) all monetary expansion must result in inflation even when the economy is below capacity - somehow prices are rising SOMEWHERE (even if the FED later contracts the supply).

Krugman was right about the volatility of non-"core" inflation. And he was right about oil and raw materials prices being high at the time due to supply and demand, not inflation.

Also, by the FED's latest actions, they are conceding Krugman's predictions, that more action - whether fiscal or monetary - was crucial to get the economy back on its feet.

What do you have to say, now?

(We should all be accountable for the words and ideas we toss out there...)