Instead of Phase I and beyond, Ben Bernanke and his friends at the Fed have been giving us QE1, QE2, and now QE3, to go along with stimulus and "Operation Twist," more appropriately named by Peter Schiff as "Operation Screw." However, there are those who believe that the more the Fed tries to prop up worthless financial securities by debasing the dollar, the more the Fed is leading us to prosperity -- and anyone who disagrees is a "hater" or a near-criminal. Not surprisingly, Paul Krugman is in that group. He writes:
Mr. Romney’s (critical) language echoed that of the “liquidationists” of the 1930s, who argued against doing anything to mitigate the Great Depression. Until recently, the verdict on liquidationism seemed clear: it has been rejected and ridiculed not just by liberals and Keynesians but by conservatives too, including none other than Milton Friedman. “Aggressive monetary policy can reduce the depth of a recession,” declared the George W. Bush administration in its 2004 Economic Report of the President.Being that I don't follow this presidential campaign much, I have no idea what Mitt Romney said in response to the latest Bernanke policy. I doubt seriously that Romney has a "plan" except to listen to his Neoconservative advisers like John Bolton and take us off to war again, with the idea that jacking up military spending will "boost" the economy.
One has to understand, however, that since 2001, the U.S. Government under both Bush and Obama have actively pursued an inflationary course, and in case one has not paid attention to the results, we are in a depression. (Oh, I forgot. The meltdown in 2008 came because the Regulation Fairies had been converted to free-market anarchism and failed to do any regulating. It had nothing to do with government and central bank policies to pump as much money into the housing market as possible, an action that was unsustainable.)
Like all good Keynesians, Krugman believes in the wonder and majesty of inflation. He declares:
The Fed’s response to this problem has been “quantitative easing,” a confusing term for buying assets other than Treasury bills, such as long-term U.S. debt. The hope has been that such purchases will drive down the cost of borrowing, and boost the economy even though conventional monetary policy has reached its limit.
Sure enough, last week’s Fed announcement included another round of quantitative easing, this time involving mortgage-backed securities. The big news, however, was the Fed’s declaration that “a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.” In plain English, the Fed is more or less promising that it won’t start raising interest rates as soon as the economy looks better, that it will hold off until the economy is actually booming and (perhaps) until inflation has gone significantly higher.
The idea here is that by indicating its willingness to let the economy rip for a while, the Fed can encourage more private-sector spending right away. Potential home buyers will be encouraged by the prospect of moderately higher inflation that will make their debt easier to repay; corporations will be encouraged by the prospect of higher future sales; stocks will rise, increasing wealth, and the dollar will fall, making U.S. exports more competitive.In other words, the Fed goes into the markets, purchases securities that the market has declared to be near-worthless, spread dollars all over the place, and out of that will come a booming economy spreading prosperity wherever it may roam. This is about as credible as Aaron's reply to Moses about the shaping of the Golden Calf when Aaron claimed that he threw gold into a fire and the calf magically appeared.
This policy would work if an only if the economy were a mass of homogeneous factors. However, if factors of production are heterogeneous, and that a functioning price system, complete with profits and losses, is the means by which entrepreneurs do economic calculation, then the Keynesian "solution" is only making matters worse in the long run. There is no way around this point, and the longer the Fed and this government try to prop up worthless investments and the longer Bernanke and Obama try to divert scarce resources to those lines of production that are not profitable, then the longer this downturn will last.
Krugman's Keynesianism is based upon a belief that when the economy goes into a downturn, the Law of Opportunity Cost goes into hiatus. That is another way of saying that depressions make scarcity disappear and that the only thing needed is for more spending and more inflation, which will permit us to pretend we are wealthier than we are. Out of that faux wealth will come real wealth.
Get it? Yes, the only thing standing in the way is the dollar, and if we print it into oblivion, we will become rich.