Monday, October 24, 2011

There's a hole in the logic, dear Krugman, dear Krugman...

When numerous financial houses and banks in the USA and Europe were finally exposed for their massive holdings of worthless securitized mortgages and the infamous Housing Bubble was exploding, the political and financial "leaders" around the world quickly decided upon the "solution": Create a bigger bubble, and use the government's ultimate "Rabbit-Out-of-the-Hat" scheme, which is getting the central banks to do what governments in Latin America and Zimbabwe have done to pull off the scam.

In a recent column, Paul Krugman excoriates these creators of the New Bubble for their actions. No, he is not declaring that all they did was to make the problem worse; instead, he tells them in no uncertain terms that, in his opinion, they didn't make the Bigger Bubble big enough.

Yes, had the U.S. and European central banks been even more aggressive in creating and sustaining a huge bubble in government securities (that are as worthless as the mortgage securities that turned toxic), then we would be in a real economic recovery right now. If you think I am joking, read what Krugman says:
Think about countries like Britain, Japan and the United States, which have large debts and deficits yet remain able to borrow at low interest rates. What’s their secret? The answer, in large part, is that they retain their own currencies, and investors know that in a pinch they could finance their deficits by printing more of those currencies. If the European Central Bank were to similarly stand behind European debts, the crisis would ease dramatically.
Yes, what Krugman is saying is that the central banks of the USA and Great Britain can print money to buy their own government securities and the process can go on indefinitely. Lest anyone think that printing more dollars and pounds might have a negative effect upon those currencies, Krugman also has The Answer:
Wouldn’t that cause inflation? Probably not: whatever the likes of Ron Paul may believe, money creation isn’t inflationary in a depressed economy. Furthermore, Europe actually needs modestly higher overall inflation: too low an overall inflation rate would condemn southern Europe to years of grinding deflation, virtually guaranteeing both continued high unemployment and a string of defaults.
Yeah, it all is Ron Paul's fault. But in the next paragraph, Krugman demonstrates that he wants the Federal Reserve System to do what has been prohibited from the very creation of the 1913 law that created the Fed: have the central bank purchase short-term U.S. Government paper in the primary market. He writes:
But such action, we keep being told, is off the table. The statutes under which the central bank was established supposedly prohibit this kind of thing, although one suspects that clever lawyers could find a way to make it happen.
The cynicism drips off the column with that one, and his comments are a dream come true for those who claim (falsely) that governments are "not revenue constrained," as though the printing press can erase the Law of Opportunity Cost. Krugman's Ultimate Solution, one that I have said for months underlies most of his economic commentary, is dependent upon printing money and nothing else.

Understand the logical construct of what Krugman has declared in this latest column. If the various central banks announce that they are going to start buying short-term government bonds from whatever country seems on the verge of default (or simply cannot pay its bills with regular tax revenues), this immediately will stop the various runs on banks that are holding this government paper, increase the value of government bonds, lower interest rates, bring more spending in the economies of the world, and give us a widespread economic recovery. That is the Krugman economic logic in one sentence.

So, recovery is just a "clever lawyer" away. Intent of laws that were written to prevent the U.S. and European governments from doing what Juan Peron did in Argentina and Robert Mugabe did in Zimbabwe mean nothing, and Krugman makes it clear that he really believes that the secret to prosperity is the printing press:
The story of postwar Europe is deeply inspiring. Out of the ruins of war, Europeans built a system of peace and democracy, constructing along the way societies that, while imperfect — what society isn’t? — are arguably the most decent in human history.

Yet that achievement is under threat because the European elite, in its arrogance, locked the Continent into a monetary system that recreated the rigidities of the gold standard, and — like the gold standard in the 1930s — has turned into a deadly trap.
So, it turns out that the secret to Europe's prosperity was not producing goods and services that other people wanted and needed. Instead, the "secret" was political democracy and the welfare state, as though both of these entities actually produce something. No doubt, Krugman claims that these economies are in a "liquidity trap," and such a situation turns the laws of economics upon their heads. That is nonsense, pure nonsense, for no government and no economist can repeal the Law of Scarcity and the Law of Opportunity Cost.

The world is in financial trouble because central banks, the financial districts, and governments created massive malinvestments in housing and the stock markets in order to achieve a veneer of "prosperity." Those malinvestments have been exposed, and exposed greatly.

Instead of dealing with that reality, Krugman and others insist on creating a New Reality, one in which people are forced to "invest" in government spending, as though flooding economies with various currencies magically will bring back the prosperity that was lost. In other words, Krugman believes that creating The Mother Of All Financial Bubbles in government securities is going to bring our economies into the bliss of recovery. While Krugman uses the song, "There's a Hole in the Bucket," to push his point (the solution, according to Krugman, is to fill the "bucket" with newly-created money), he forgets that his logical constructs themselves are full of holes.

What happens when THAT bubble blows up like a volcano? Just print more money.


W.C. Varones said...

Isn't this exactly the argument of the Modern Monetary Theory (MMT) wackos?

And isn't this a big new step for Krugman? I didn't know he was an MMT-er.

Anonymous said...

The whole point of the "liquidity trap" (or labor glut as I prefer to think of it), Mr. Anderson is that labor (and a fair amount of capital) is not scarce. Its sitting around idle. Thats why your "law of opportunity cost" is different right now- we have idle resources, and there is little (or no) opportunity cost to employing idle resources.

Normally if the government wants to build a road or whatever its taking away from private enterprise. However, right now we have a lot of idle construction resources.

William L. Anderson said...

By definition, then, you are saying that labor is not scarce during a "liquidity trap." The question you are not asking is this: Why are these factors not being used? Krugman claims a lack of aggregate demand, but where is the causality?

Obviously, we both agree that there is a lot of unemployment of resources, but we disagree on the cause. Second, we disagree on what it will take to bring back the economy.

By the way, you have not addressed my point that the "solution" has been to create other bubbles. Are bubbles really a solution, or do they make the hole deeper?

Tom E. Snyder said...

When I think of bubbles I think of a child blowing them from a wand with soapy water or a bubble bath--both pleasant experiences. We need to call them "blisters", a very unpleasant experience.

Krugman assumes that the blister economy is normal and our current situation is abnormal when it's really the other way around.

Today, like in the 30s, it is assumed that high prices (whether in wages or real estate, etc.) are a sign of prosperity. Not so. Remove government controls (such as price controls on interest rates) and watch the economy grow.

Dennis said...

"...we have idle resources, and there is little (or no) opportunity cost to employing idle resources."

Of course there are opportunity costs to employing these idle resources! If the government employs these resources, it will inevitably do so by means of taxes, borrowing or inflation.

Taxation just shuffles resources from their rightful owners and hands them over to those who are politically connected. No net gain for the economy there.

If the government borrows the money, it will incur interest costs as a result. If the spending is focused on enterprises which are outright money-losers, (which it usually is) there is no hope of getting any positive return on the investment. Add interest expenses to the mix and debt servicing costs will always outstrip revenues.

If the state merely "prints" the resources to buy these idle factors, over time those who receive the alleged benefits find that the state's largesse offers them nothing because prices always rise faster than wages. Because inflation is never evenly distributed, the average wage earner is always the hardest hit by such policies.

Paul said...

Sometimes I get the impression that the likes of Krugman WANT depressions so that they can support endless expansion of government and inflation, and when critics rightfully challenge it, they have the fall back excuse that all that money printing and spending is OK because we're in a depression.

Sometimes I also get the impression that the international bankers wanted an economic collapse so that they can then finance perpetual war without leading to as high a rate in rising prices, and they can count on stooges and tools like Krugman to placate the masses who are told it's all justified.

ekeyra said...

"Thats why your "law of opportunity cost" is different right now"

Hey prof anderson, didnt know that concept was simply a figment of your obviously fevered and addled mind and not a reality that keynsian adherents really really wish would go away.

August West said...

But such action, we keep being told, is off the table. The statutes under which the central bank was established supposedly prohibit this kind of thing, although one suspects that clever lawyers could find a way to make it happen.

Let's just ponder the insidiousness that for a moment, shall we? Wink, wink, nudge, nudge invite to "clever lawyers" to facilitate creation of the The Really Biggest Bubble Ever. But, he is a Nobel Laureate. And he writes for the New York Times. And he's got lemmings hypnotized.

::..insert pukeguy.jpg here..::

Calgacus said...

Yes, had the U.S. and European central banks been even more aggressive in creating and sustaining a huge bubble in government securities (that are as worthless as the mortgage securities that turned toxic)

If you really believe this, Professor Anderson, then please send me some of these worthless government securities. I'd even be happy to pay 1 cent on the dollar now for future delivery of all your government bonds whenever you think the bubble will burst and they become worthless.

And the historical evidence and logical rationale is clear that for a given level of deficit spending, "printing money", which sets interest rates at a low level, is less inflationary than "printing bonds" (miscalled "borrowing").

Dan said...

So let me get this straight, somehow China would continue to buy US treasuries if the US government makes the US dollar worthless? What kind of logic is that? How is Krugman an economist?

Anonymous said...

"Europe actually needs modestly higher overall inflation: too low an overall inflation rate would condemn southern Europe to years of grinding deflation, virtually guaranteeing both continued high unemployment and a string of defaults."

Deflation? What "deflation" in southern Europe is the insane lunatic Krugman babbling about?

I imagine that what most people there are experiencing right now is very similar to what we're experiencing in North America right now - costs of energy, food, etc. spiraling upward, stagnant salaries and high unemployment - only it's probably a lot worse in Europe. In other words stagflation.

That ridiculous fool Krugman will condemn Europe (if not the entire world) to decades of stagflation, in order to fight what he claims is "grinding deflation" but which is actually the normal, expected, inevitable and highly desirable collapse of the late-20th Century social-welfare pyramid scheme.

Anonymous said...

And the worst effect of money printing is....That it breaks the Law of Diminishing Marginal Utility. All fiat currencies are backed by violence. As the value of the currency declines people attempt to find substitutes. Well governments to maintain the use of their fiat currencies must become increasingly more brutal in the treatment of people in order to force them to use the increasingly worthless currency.

William L. Anderson said...

Someone posted anonymously about the tripling of the monetary base and liquidity traps. I thought that I had approved the comment, but it has not come through.

I am posting this because if I erased the comment, I did it accidentally and would invite the poster to redo it.

Anonymous said...

Krugman must have smoked a lot of weed in the 70's because he must have missed this event.

Why bother with treasury purchases, why doesn't Krugman just say what he means and start advocating MMT and Chartalism?

Thanks for taking the hit for us by reading and demolishing his stupid columns, I cant bear to read a single one of them, they're just too stupid.


Eric said...

I'm not as understanding of Krugman's views in this area compared to other areas, but I believe his response to this would be that a central bank has the ability to create a controlled deflation, to let the air out of the bubble gradually rather than let it burst. As an example, he uses Volcker's term on the federal reserve. Volcker was able to gradually bring the stagflation crisis under control by keeping interest rates high. This led to a depressed economy, but it prevented a boom and crash similar to what we are experiencing now. I would assume Krugman would want a similar policy to be used to deal with the current crisis, a large run up in inflation to lower unemployment, followed by a decade of very gradual deflation.

Also, you have to remember that Krugman primarily wants to combat the depression through stimulus spending, monetary policy is only a backup policy when fiscal policy is politically untenable.

On that note, I really don't understand you guys' opposition to stimulus spending if its on certain things. I can understand not wanting to have the government spend money on things private enterprise can do, but it seems like Krugman is calling for the government to spend stimulus primarily on infrastructure improvements and education, things the government is responsible for most of the time (and green energy, but we talked about that in another post). If these are things the government needs to spend money on anyway, spending money on them now would be more beneficial than at other times, and private enterprise would never spend money on them, whats the problem?

Rob said...


My understanding is that Volcker essentially let interest rates float - that is, rise to what the market would bear. Krugman apparently wants to do the exact opposite of this.

Regarding stimulus spending: Austrian-School Economists, of which Dr. Anderson is one, oppose government spending and even government ownership of infrastructure. If private enterprise (i.e. people on their own) would never spend money on them, why exactly should anything be done there?

Rob said...

Finally, the whole point of Keynesianism seems to be to preserve wealthy elites' asset values. Bailouts and money-printing are perfectly in line with this.

Anonymous said...

Only someone that truly doesnt understand anything would claim what you just did. Krugman is right when he says the ecb should promise unlimited liquidity to prevent bank runs, and he's also right when he says it wouldn't be inflationary.

Banks need liquidity to make sure their depositors can remove their money at will. Providing liquidity won't increase demand. it's not actually increasing the total amount of money people hold, it's assuring they can access the money they already have. Therefore the ecb should pledge unlimited liquidity to Italy and Spain while the eu manages a substantial write down on Greek debt and takes measures to promote growth in Greece, rather than continue to force procyclical austerity.

Anonymous said...

It's amazing how people that have never read/do not understand the concept of a liquidity trap are so quick to dismiss it.

There are so many ways to arrive at the conclusion.

If interest rates are close to 0 demand for money becomes nearly perfectly elastic. The small benefit of low yielding bonds won't be worth the decreased liquidity that comes with buying a bond. In other words the LM curve becomes horizontal and increases in money supply don't change the point at which LM intersects IS.

In laymens terms it could also be attributed to the expectation of normal inflation in the future, despite high inflation in the present. Money becomes a store of value. Undervalued currency can be hoarded with the knowledge that it will be revalued in the future by any sane central bank.

Boom, liquidity trap. Problem with that analysis?

Rob said...

If depositors' money was simply kept deposited within the banks, they could remove it at will without the banks needing any extra "liquidity". Of course, that would eliminate the entire fractional-reserve-banking shell game.

Anonymous said...

"If depositors' money was simply kept deposited within the banks, they could remove it at will without the banks needing any extra "liquidity"."

Are you serious?? Wow....

The Federal Reserve was created to end runs on banks. Every bank, even before the fed existed, had less cash on hand than the total deposited. Your claim is backward. You do not understand anything