Tuesday, April 19, 2011

Krugman: Markets are good -- when they supposedly endorse Krugman's position

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.


AP Lerner said...

Sorry Prof. Andersons, you have hit a new low, with comments like this

'anyone who claims differently does so because he or she is a racist or an Obama-hater (which means the person is a racist).'

and this

'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.'

Not only do these comments have nothing to do with critiquing Krugman from an Austrian angle, but they are also divisive, ignorant, incoherent, and frankly an embarrassment to you and the university you represent.  I disagree with 98% of what you write because you are a bad economist, but at no point has anyone (that I'm aware of) personally attacked you with this kind of vile nonsense.  And don't give me the tongue and cheek excuse again.  If this is tongue and check, you need to have your sense of humor examined.

The good news is post like these are now part of the public record, and like your other posts where you display your ignorance (like the ignorance you posted on bond rates a year ago - how's that prediction working out for you?) and you're baseless accusations (like where you accused Krugman of endorsing Maddoff and theft), you'll be proven wrong and shown to be a classless citizen.  Unfortunately, the crowd you appeal to has little interest in actual facts or data or ideas, and are only interested in supporting an ideology based off myths and lies, so I'm sure you'll always find an audience to preach to and feed your ego.

If you are angling for a full time position at Fox, I guess this is the route you need to take.  But if you are looking to educate, well, I hope you fail miserably and are removed from your position sooner rather than later with these kinds of tactics.  I'm embarrassed my tax dollars go to this nonense.

Good luck.  You'll need it.

Anonymous said...

Good post Lerner. I liked how the article took a sharp turn midway away from unbased criticism of Krugman to rating agencies in general.

Anderson thinks Krugman is against ALL markets. He thinks that he argues there is no inflation based on bond rates alone. That is just patently untrue and utter hyperbole. And of course Anderson will say that because Krugman can be hyperbolic, he can too. Silly.

On inflation, Krugman has persistently talked about bond vigilantes, but also produces lots of evidence to suggest that absent food and energy prices, core inflation is flat (most recently on his April 16 post). Fact is we have been hearing about inflation for over two years now and Austrians are still looking for that piece of confirming evidence, no matter how long down the road it comes.

He also seems to not really understand how supply and demand curves work.

jason h said...

AP you must have missed the piece by Krugman, where he insinuates those that support ABCT are "big Lincoln-hat[ing] [...] defender[s] of the Southern secession." which is Progressive-speak for racist.


absent food and energy prices, core inflation is flat

Good thing most people don't need to eat, or drive.

Haven't the Austrians mentioned that the way the Feds measure core inflation is dubious at best. In fact, they had to change the way its calculated a few times to massage the numbers.

ekeyra said...

Way to call out prof anderson on his unwarranted personal attack and then make... an unwarranted personal attack. Stay classy. I also think the point of the article completely whiffed over the top of your head. Krugman says prices dont matter, until he thinks they prove his position then suddenly theyre very important because he believes they validate his argument. It makes him a hypocrite. Also if you truly believe prof anderson wants a job at fox you dont know him very well.

"lots of evidence to suggest that absent food and energy prices, core inflation is flat "

I just had to pull this out and let its ignorance shine brighty. If you ignore the resources people need to eat and live their lives, theres no inflation. hahahahaha I needed a laugh. thanks. Also how can you be against some markets and not be against the market itself. Being ok with an unregulated market on plasma tvs but not an unregulated market in healthcare means you have a problem with markets. It is highly inconsistent to say that it is ok for plasma tvs but not for healthcare. You do not get to pick and choose which goods and services are eligible for market forces to act on because they are all on the market no matter how you try to distort it with government intervention.

Mike Cheel said...

@AP So if the agencies did downgrade then what would the federal government do? Sit idly by and just take it? What do you think they would do?

And you don't dispute that it is a rob peter to pay paul scheme? Or that, as Prof. Anderson is saying, that the ratings are political in nature? Well what are they then? Honest? Same as everyone else?

Could you explain the 2% that you do agree with Prof. Anderson?

Anonymous said...

"absent food and energy prices, core inflation is flat"

So I guess anyone who doesn't need food, fuel, or electricity is in the clear right? That's reassuring.

Oh, wait... never mind.

Bob Roddis said...

Austrian Man: This wacky funny money dilution scheme of yours is trying to solve a problem that does not exist. The unregulated market does not result in depressions. Depressions are caused by the distortion of economic calculation as the result of your funny money dilution schemes. In fact, due to Cantillon Effects, those distortions, including trying to accurately predict price inflation, are going to be very difficult to gauge and measure.

Statist Man: HA HA HA. You can’t predict price inflation! You know nothing! You’ve been refuted!

Bob Roddis said...

1. Note the sinister glee of the statists regarding the people who are simultaneously suffering from high food and energy prices while their home values, which they had viewed as an important form of savings, have imploded, all due to the statists’ own funny money dilution schemes.

2. Karen DeCoster also writes today about corrupt bond ratings:


Unknown said...

You can always count on AP Lerner to make a fool of himself! I am also very happy that all of this is a matter of public record, it's unfortunate that he doesn't realize how idiotic he sounds.

- Michael

Anonymous said...

But is food and oil due to monetary expansion? I never said that inflation in food and oil is not a problem for the economy, and Krugman would agree.

Look at the BPP or core CPI.

Robert V said...

Aside from food and fuel there is no inflation. Also aside from tower 1 and tower 2, 9/11 was a routine day in NYC

Bob Roddis said...

But is food and oil due to monetary expansion?

How can anyone really know for sure? Why dilute the funny money supply in the first place? The purpose of the dilution is to solve a problem that does not exist and it itself is that problem.

Why oh why oh why can't these statists at least understand our position?

jason h said...

But is food and oil due to monetary expansion?

Very likely. In most cases the price increases due to monetary inflation is negated with increases in productivity or decreases in demand. Demand for food and fuel rarely decrease and it is much harder to increase crop yields.

You can wear the same clothes for an extra year, or drive your car longer, but you have to buy groceries and fill up your tank every week.

Anonymous said...

But then you ignore the global rise in demand for food prices.

Krugman's point is that the largest part of the prices we pay for things is labor - and since labor costs are not rising but falling, we do not need to worry as much in the long term about inflation. Mankiw has some interesting stuff on this at his blog. Either way, it is soooo distant from the bologna that Anderson spews here.

Bob Roddis said...

Without monetary expansion, there would be a relatively fixed amount of money. If food and energy became scarce, the price for those things stated in terms of other goods and services would increase. As such, the "price" of those other goods and services would go down.

I agree that it is likely that the present round of price increases for energy and food is due to monetary expansion. But to the extent there is some doubt about that, this says nothing about Austrian theory and is simply another demerit for the funny money regime which impedes and distorts informed economic calculation.

American Patriot said...

I see that trolls like AP Lerner are out in force. I wonder where he got his economics education? In the pages of NYT perhaps?

Bob Roddis said...

Krugman's point is that the largest part of the prices we pay for things is labor - and since labor costs are not rising but falling, we do not need to worry as much in the long term about inflation.

I can never really tell if Krugman truly believes the stuff he writes or is simply a knowing ideological and partisan hack who writes his BS with full knowledge that it is BS. But if he actually thinks that further money dilution is harmless, helpful and/or OK because wage rates are falling, then he's a complete idiot.

What part of Cantillon Effects don't you statists understand?

William L. Anderson said...

For Krugman and some of the others on this blog, "inflation" is an increase in a statistic, the Consumer Price Index, which is a weighted average. Furthermore, from what I can tell, Krugman seems to hold that a price increase in anything that is higher than the "core average" of the CPI then must be attributable to other factors.

That is nonsense. Food and fuel prices are going to be much more sensitive to quick decreases in the value of money than are other goods. Krugman's viewpoint is disingenuous, but hardly surprising.

Anonymous said...

Then how come commodity prices have always fluctuated so much more than core inflation, even during periods of no monetary expansion? And where does Krugman say that anything higher the core average must be attributable to something other than inflation? His point was that the fear of massive inflation is unwarranted, and in fact there is more evidence indicating deflation.

And then how do you separate the impact of monetary expansion on food prices from the global growth in demand for food?

Anonymous said...

'Then how come commodity prices have always fluctuated so much more than core inflation, even during periods of no monetary expansion?'

Could you be a bit more specific? Which period are you referring to?

Anonymous said...

One example comes to mind - 1998-2000 there was a big rise in food prices while M1 money supply declined.

Anonymous said...

What about M2 and M3?

Tel said...

Firstly: there is no need to search for conspiracy in order to find that the ratings agencies are useless -- you only need to observe their complete and total flub after the 2008 real subprime estate collapse and their rating of CDO's that turned out to be junk. Whether these people are corrupt, inept or possibly both really does not matter, the fact is their advice has been demonstrated to be worthless.

Secondly, using the price of US government bonds as a measure of free market value is a waste of time. The Fed openly admits to manipulating that particular market. How could Greenspan have kept interest rates low for so many years if this was an open and free market?

Finally: Krugman's recent quote pretty much explains where the brain-gap is sitting:

If an increase in debt-financed business investment expands the economy; if an increase in debt-financed consumer spending expands the economy; then how can it be that an increase in debt-financed government spending doesn’t do the same thing?

... and the answer as given by many people before (and now repeated by myself) is that free-market spending and government-allocated spending do not spend money on the same things.

Government-allocated resource spending can sometimes turn out to be very good, but this is rare. More often government spending fulfills a political requirement to buy marginal voters rather than considering any true economic justifications. Even if they did honestly intend to be delivering an optimal allocation, they generally don't actually know the correct answer. That's why centrally planned economies operate so inefficiently.

Krugman once again clearly shows his presumption that all economic activity is homogeneous, and he continues to cling to this no matter how many people explain how wrong this is.

Anonymous said...

The other day someone asked if Paul Truman ever wrote about personal liberty. I found.this.on his blog which would seem to indicate that he does.


Anonymous said...

Can't post messages on my phone appearently Paul Krugman not Truman :X

Mike Cheel said...

I want to hear the Ks and the MMTs defend this:


Mike Cheel said...

For those who are too lazy to read the article I posted I will give the headline. That in itself should spell it out:

'Dollar succumbs to weight of debt, loose Fed policy'

Imagine that?!?

Tel said...

AP Lerner on Nov 10 last year said, "Here's another free prediction for the folks on this blog: be ready for the dollar rally." then I asked him to clarify and on Dec 4 he said:

The dxy was at 75 when I made that prediction in early Nov. It's now @ 79. Take 5 minutes and google what it's up against. FYI-it's up against the yen, which I'm short.

Now the DXY is actually primarily up against the Euro, and anyone who wants to check will see that the low point of 75 happened earlier than Nov 10. To make it all the more laughable, the DXY has shown four months of continuous losses as the Chinese (in their inscrutable wisdom) have decided that pissing away their life savings in Greece and Spain is more fun that pissing away their life savings on US treasury bonds.

Sure we all know that either the EU kicks out laggard nations such as Greece or else the Euro will fall apart... eventually. But right now, the US money printing machine is devaluing currency faster than the Greek dodgy accountants can achieve.

ekeyra said...

"The other day someone asked if Paul krugman ever wrote about personal liberty. I found.this.on his blog which would seem to indicate that he does.


Anon, you dont speak krugman so ill translate.

Krugman: It makes me physically ill to see george bush violating civil liberties, but as long as a democrat is trashing our rights, illegally detaining civilians, starting wars, and basically being a sociopath all is well with the world.

That article does nothing to defend krugman's views on liberty and says everything about him being nothing more than a shill. Every single outrage he lists was continued or escalated under the obama administration and that is "democracy intact". you fail sir. You fail hard.

Unknown said...

So if AP Lerner is correct and the only signs of inflation are in food and oil, then other commodities, say, cotton and copper should not have risen in price like the anomolies food and oil, right? Wrong. I supplied the links on an earlier post by this site makes my computer crash, so I'll let you look them up. And that's just two commodities off the top of my head. I bet MOST have risen in price. Gee, those Austrians seem to always get it right, don't they. Not so much for the MMTers or Krugmanites.

Wolkin said...

Prof. Anderson,

I'm a Freshman student majoring in Economics at UNC Greensboro, and I was hoping you could clarify your statement in the first paragraph on price theory. I've used price(P), quantity(Q), and GDP as axes in the past, so I understand that much, but not how the use of P in that situation relates to Keynesian economic theory specifically. What exactly were you referring to?


Anonymous said...

Everyone who is arguing against the idea that aside from fuel and food prices increasing inflation is flat is missing the entire point. Of course fuel and food prices matter! Krugman never argued that. He argued that aside from fuel and food prices, inflation is flat.

The reason fuel and food prices are going up are largely due to market volatility (e.g., Middle East uncertainty, it being a bad year for many crops, fuel prices driving up food prices, etc.). So yes, you can have fuel and food prices increase without an erosion of the value of currency.

Anonymous said...

William, you're so right. We are headed for hyper-inflation! Unfortunately, inflation is part of the leftist conspiracy, so its hiding itself. Come out inflation, hurry up and increase to prove our theory right!

Anonymous said...

I was worried that inflation was happening but now I am not.

Wages are falling!

This will stop inflation dead in its tracks.

Rising prices of natural resources and falling wages do not under any circumstances show a decline of a country either.

Unknown said...

Gee, so every single commodity is rising in price but no inflation? So all crops everyone and all minerals are increasing in cost because of worldwide weather, wars, disruptions of some kind, and not because the US Fed has printed trillions of more dollars and is buying our debt? Hmm.

And someone thinks we won't have inflation because wages are falling? Oh, boy. I guess it's impossible under the infallible Keynesian theory to have both high inflation and high unemployment, right? Oops, wait. The 70's. Shoot. Don't worry, you'll see nominal wages rise at some point, just like prices for everything else.

Anonymous said...

Yeah because commodities are not by their very nature volatile. And not all commodities have risen - check out prices on natural gas, tea, rice, oranges, fishmeal, olive oil, or steel wire.

And why ignore the lack of such volatility in core inflation, even after such a lag effect from monetary expansion?

The data is really available, but you keep on clinging to some ideological Austrian adage. Even food inflation for the past year has been 2.7% - most of the non-core inflation is in energy costs. All commodities, absent the even more volatile food and energy has only increased by 0.2% But don't let that stop you, continue panicking.


Anonymous said...

You do know that the BLS has been understating CPI for the past 30 years or so, right? If CPI were calculated the way it was in 1990, it'd be at 6%--10% if it were calculated the way it was in 1980. But don't let that stop you from keeping you head in the sand (or in some other place, depending on how flexible you are).


Anonymous said...

Ok this might be hard for your conspiratorial brain - but please think about what you are saying, and do some basic research.

Not everything is a conspiracy, and when you search for the conspiracy everyone else seems to have their head in the sand but it is really just you.

Read this and give it the benefit of the doubt, the same way I gave Shadow Stats the benefit of the doubt. Leave behind all preconception and think for yourself.


Anonymous said...

Anon@5:28, it's really too bad there's no way to punch people in the throat over the internet, because you desperately need to be punched in the throat. Nobody said anything about conspiracies, but no person with an IQ over the single digits (which category clearly doesn't include you) thinks that the BLS' adoption of geometric methods for calculating CPI was anything but a way of understating increases in the cost of living, primarily aimed at holding down Social Security payments. Of course, it also provides conveniently rosy inflation statistics, which may fool those who have their heads permanently lodged up their asses, but doesn't fool anyone else. Now please do humanity a favor and kill yourself, along with any children you've had, so that your stupidity won't pollute the gene pool any longer.

Anonymous said...

Thanks for making my point. I am guessing you did not read what I suggested. Better to stuff your fingers in your ears and go "blah blah blah!" and call me names and threaten me physically - NOTE TO ANDERSON - if you do monitor this site, it seems common sense that comments like these should be removed.

You are still just reciting that conspiracy stuff - the government forced the BLS to adopt geometric estimates rather than Laspeyeres to understate the the increased cost of living and hold down social security payments. There are so many points along that chain of causation that you need to prove past your own assertion. And then you need to prove that moving to geometric estimates even had that large of an impact. Shadow statistics somehow comes up with 3% divergence annually. But BLS reports the divergence - 0.28%.

You also need to address all of the logical points of having geometric rather than upper-bound estimates. An example from the paper itself - peanut butter bars and chocolate bars all cost $1 each and you used to buy 2 each. Then the price of chocolate rises so that bar is $4. How should the BLS address this change. The upper bounds is $10 - or $6 inflation. That assumes that you are highly biased toward chocolate and that any shift to a lower cost product would lower your level of satisfaction. The geometric results - $10 and $4 inflation. The bias only really happens if the price of one product rises enormously while the price of the other falls drastically.

That is a glimpse of the nitty gritty. You can always tell when someone has not really thought about something - they go directly to threatening them with violence.

Anonymous said...

Correction - in my example the geometric estimate is $8.

Tel said...

Re the chocolate bar example. Let's suppose on year 1 we have a purchase of 2 peanut butter bars, and 2 chocolate bars at $1 each real total $4, geometric total also $4.

Then on year 2 we have exactly the same bars but chocolate is now $4 per bar so real total $10 but geometric total is $8.

Now on year 3 the manufacturer of chocolate bars decides to sell "family size" bars instead of regular size and these bigger bars cost $8 (i.e. the price of chocolate has not changed). Now the equivalent purchase is 2 peanut butter bars and 1 large chocolate bar so real total is $10 but geometric total has changed to $6.

Somehow we get deflation between year 2 and year 3 due to product repackaging. Does this make sense?

Does the supermarket do a geometric total at the cash register? Does the bank do a geometric total of transactions to calculate your balance?

Tel said...

An excellent youtube skit would be some guy dressed up as a nerd and turning up at the supermarket checkout.

checkout chick: Greetings sir, how are you today?

nerd: Great! I'm from the Bureau of Labor Thtatithticth and thith is my bathket of goodth [hold basket under one arm].

... after the goods are totaled up through the cash register ...

nerd: [peers at the total] You theem to be uthing a linear thithtem there. May I thuggestht that geometric ith thtatithtically more appropriate?

Nerd goes on to pull out reports and charts and try to explain (with plenty of arm waving) that the total for the goods should be something different. By this time the checkout chick has called in her supervisor.

supervisor: So let me get this straight, you want to pay less for the basket of goods that what you would pay if you bought each item separately?

nerd: In a nut-thell, yeth!

checkout chick: We've been getting a lot of this lately.

security: Sir, you gonna have to leave now.