Friday, May 18, 2012

Krugman and the "Magic" of Inflation

I remember reading a book 30 years ago in which the author said that in the end, Keynesians have one arrow and only one in their quiver: inflation. While they might deny that to be true (Hey! We have FISCAL policy!! We borrow a lot of money that is created by the Fed!)

But Paul Krugman certainly seems anxious to prove the author's point, as once again he calls for the "solution" of printing money as salvation for Europe. For that matter, he has long advocated the same "salvation" for this country, continuing that fallacy that our economy is exactly like the so-called babysitting co-op in Washington.

Today's column is pretty typical of Krugman. While I agree that the bank-imposed "austerity" measures put on the regimes of Greece and Spain are not helpful to economic growth, my differences with Krugman are substantial. To Krugman, the entire thing is spending; the more a government spends, the richer everyone becomes, end of discussion. And if the government does not have enough to spend in tax revenues, then print money or borrow, but spend, spend, spend.

As I see it, restructuring any economy in order to place its debt service at the top (which means high tax rates) is likely to be counterproductive in the short run AND long run. Like it or not, governments usually are an impediment to economic growth and certainly not an engine of the same.

For Krugman, financial bubbles ARE the soul of capitalism, period. In his view, investors are a bunch of lemmings that always run over the cliff unless wise government agents steer them otherwise. As Austrians see it, the culprit is going to be the central bank or government in one form or another.

(For those people who claim that the housing bubble was SOLELY the result of private investment, they ignore the role of the Federal Reserve System, Freddie and Fannie, and a government that demanded that more people be put into home ownership, damn the consequences.)

So, what is Krugman's "solution"? He provides it here:
Italy and, in particular, Spain must be offered hope — an economic environment in which they have some reasonable prospect of emerging from austerity and depression. Realistically, the only way to provide such an environment would be for the central bank to drop its obsession with price stability, to accept and indeed encourage several years of 3 percent or 4 percent inflation in Europe (and more than that in Germany).

Both the central bankers and the Germans hate this idea, but it’s the only plausible way the euro might be saved. For the past two-and-a-half years, European leaders have responded to crisis with half-measures that buy time, yet they have made no use of that time. Now time has run out.

So will Europe finally rise to the occasion? Let’s hope so — and not just because a euro breakup would have negative ripple effects throughout the world. For the biggest costs of European policy failure would probably be political. 
Yes, salvation through inflation, as though a central bank can "manage" rates of inflation over time. Krugman's love affair with inflation totally ignores the underside of such a policy, and ignores the fact that over time, the corrosive effects of inflation grow and any "positive" effects (i.e. "deleveraging") tend to diminish.

You see, Krugman truly seems to believe that the only "bad" effects of inflation would be higher prices, although those higher prices would be offset by higher incomes. Inflation, at least in Wonderland, has no effect upon investors' choices, it does not direct money into lines of production that are unsustainable, and it has no destructive effects at all unless it gets out of hand, and even then, the results are not very bad.

Like the Bourbons who, in the words of Tallyrand, "learned nothing and forgot nothing," the Keynesians never learn from inflation, and in the end always reach for that last arrow. Like Krugman, who apparently believes that the Obama administration can subsidize the economy into recovery (see "green energy" and other such nonsense), Keynesians truly believe that all assets are homogeneous, and that an economy is a mixture into which one stirs money and if one stirs in enough money and forces everyone to spend, out of it comes prosperity.

That is a Wonderland view of economics, but apparently that is what our economic and political elites are trying to claim is the truth. So print and spend yourselves into prosperity, Europeans! It must be so, it must be so!


Dennis said...

If inflation were the key to prosperity, Zimbabwe should be the richest nation on earth.

Greece has a choice: either they make an honest effort to pay off the debts that have accumulated by slashing spending to sustainable levels and ditching all those comfy pensions, or else they will become Zimbabwe.

Stop looting the economy and try to get it to become productive again by producing real goods and services that people actually want. Having large numbers of people retiring at age 50 produces no wealth; it consumes it.

Inflation, by the way, is just another form of looting.

Mike Cheel said...

"Realistically, the only way to provide such an environment would be for the central bank to drop its obsession with price stability, to accept and indeed encourage several years of 3 percent or 4 percent inflation in Europe (and more than that in Germany)."

A central bank obsessed with price stability. I have never gotten that impression ever.

Anonymous said...

Mr. Anderson - remember this post?

Check the date. Check your comments (well Guido's comments, since you could not come up with any). Check my comments in the comment section. Then check current rates.

I think it's fair to say, after several years now, my track record regarding rates, the dollar, and the economy in general just absolutely destroys yours.

It baffles me how you are still blogging, given just how wrong you have been over the last few years on, well, pretty much everything. Intelligent people rethink there ways after multiple years of embarrassment. Of course, intelligent people also are not married to a narrow minded, misguided ideology.

Aren't you at least a little willing at this point to admit that maybe, just maybe, you have no idea how the monetary system of US operates? Do I need to repost your comments and then my comments on the dollar as well to further prove my point (and disprove yours?).

AP 'I'm not above to say I told you so who made a killing in 30 yr bonds why Austrians were hyperventilating over phony inflation' Lerner

Good luck chasing the boogey man - you're blog is less educational to your followers since I stopped posting.....!

Bala said...

"Aren't you at least a little willing at this point to admit that maybe, just maybe, you have no idea how the monetary system of US operates?"

Are you ever willing to admit that maybe, just maybe, you have no idea how the economy operates?

Pulverized Concepts said...

Krugman says: "It would also have much the same effect that the failure of austerity is having in Greece, discrediting the political mainstream and empowering extremists."

That would be a good thing.

CG said...

Really? Like in Germany 1933...

Pulverized Concepts said...

Sure, without effective politicians society will descend into? The political mainstream should be discredited because they're failures, they have, after all, created this mess. And it's not extreme for the Financial Stability Fund to give 18 billion euros to the banks. Why would you think that the only alternative to the present fiscal profligacy is a replay of Germany 1933?

jammintoast said...

And what was your name again?

Dan said...

Dennis says, "Greece has a choice: Either they make an honest effort to pay off their debts...or else they will become Zimbabwe."

I happen to be employed by Agfa Healthcare. This past week I learned what a financial "haircut" involves if you've been trying to do business with Greece. I haven't really seen this described in detail in the media.

In 2010, Agfa and all other healthcare companies doing business with Greece's government hospitals began seeing these hospitals not pay their bills in a timely fashion. Several healthcare companies banded together and approached the Greek government to resolve the situation. The Greeks' solution was to issue government bonds as payment for goods and service received from these healthcare companies. These IOUs were to be repaid in 3 installments over 2 years.

Greece only paid the first installment and defaulted on the rest as per the debt restructuring plan of March 2012. We're talking millions of Euros here.

So I might add, if Greece becomes Zimbabwe, a lot of the rest of us are dragged in the direction of Greece.

Anonymous said...

For the guy talking about the bond rates: well, at lest I considered the US government at least not completely insane and willing to obliterate the dollar in the long run and make the US debt reach even higher levels. That's why Anderson thought rates would bo belly-up. But yeah, you know much about the US currency system.
BTW, congratulations, you are a typical economist: you know macroeconomics stuff and you ignore the real world because it doesn't fit your formulae.

Charlie Schnickelfritz said...

@The guy talking about bond rates, you and Dr Anderson are both wrong because the Fed has been aggressively manipulating interest rates. What we are actually seeing in USTs is a dollar carry trade, more derisively called "front-running the Fed" in, um, other forums. It's a pretty simple swap:

1. Fed loans to primary dealers at negative real interest.

2. Primary dealers bid on Treasury paper at slightly higher interest, using leverage.

3. Fed buys the Treasury paper from the dealers.

Bond prices don't mean anything right now. Anyone could tell any story or make any prediction based on the "fundamentals" right now, precisely because the fundamentals are no longer driving the long-term trends in price. No one knows what's going to happen when the Fed stops manipulating the market...or when that will happen, for that matter. It's not hard to recognize the bubble. What's hard is figuring out whether it's about to pop or whether you can still make money from it.

Anthony Lima said...

Very nice. I like!
Central banks have never succeeded in one mandate much less two.

Blogger said...

There's a chance you're qualified for a new government sponsored solar program.
Click here to find out if you are qualified now!