The lure of inflation

In a couple of blog posts this week, Paul Krugman has heaped praise upon that phenomenon known as inflation, claiming, among other things, that the euro could be successful only if it is inflated enough. Since Austrians say that inflation is bad, period, there obviously is a huge disconnect between the two camps.

Before going further, however, I need to clarify the difference in how Austrians and Keynesians define inflation (and even there, I am sure that I will leave out lots of nuances that could invoke lots of discussion among Austrian-oriented grad students). Keynesians see inflation as an increase in the government-created "price level," period. Inflation is defined as a visible and general rise in prices and nothing else.

Thus, according to Krugman and the Keynesians, a large increase in the monetary base itself (excess reserves held by U.S. banks) is not in itself inflationary, especially if the reserves just sit there and are not loaned out. (Obviously, if they are loaned into the system and the new loans reflect the amount of money in that base, then even the Keynesians agree that price levels will increase -- which is exactly what they want to happen.)

Austrians, on the other hand, hold that the actual increase in the amount of money in circulation is inflation in and of itself, even if the monetary increase is not reflected in an increasing price level. The reason for this position is that increasing the amount of money in circulation is going to affect the relationships among assets, changing relative prices.

Furthermore, increasing the amount of money in circulation also keeps prices higher than they would have been otherwise. Furthermore, Austrians argue that even if the official government price level index is relatively flat, nonetheless, the increase in the amount of money in circulation is going to have a negative effect upon the relative value of both higher-order and lower-order goods.

As I see it, Krugman's praise of inflation is based upon an assumption that inflation will provide the cut in real wages, making labor relatively cheaper (and boosting employment), and the fact that money is losing its value brings people to spend rather than save. (Don't forget that the vaunted Keynesian "multiplier" is the number 1 over the rate of savings. So a higher rate, say 20 percent, produces a "multiplier" of 5, while a 0.01 percent rate of savings gives us a multiplier of 100. So, the less we save, the wealthier we will be.)

Krugman also has praised inflation as a tool for "deleveraging," which is a nice way of saying that we can inflate away debt by debasing the dollar and paying the debt service in cheaper money. (One is reminded of people paying their "debts" in Weimar in 1923 by dumping bags of worthless money onto the desks of creditors.)

This is part of what Krugman claims is a "free lunch." But it clearly is not, as the borrower might be gaining a temporary advantage, but as inflation increases, lenders protect themselves by changing the terms of the loan payments to reflect the increase in inflation.

What Krugman and other inflationists never seem to understand is that inflation is not a static thing. Over time, it draws resources from productive to unproductive uses, destroys savings (which is necessary for capital development), and it encourages malinvestments. Inflation is NOT a mechanical thing, but an insidious development in which the "good" effects are felt first (the brisk spending and the fall in unemployment). The bad effects -- malinvestments and, yes, increasing unemployment AND wildly-increasing prices -- are on the back end.

Notice that Alan Greenspan's Fed aggressively increased monetary reserves in the late 1990s, and we had a boom in which some people claimed we were in a "New Economy" in which the business cycle was a thing of the past. After the 2001 bust (when the stock bubble collapsed), the next recovery, featuring the housing boom, was not quite as robust as what had been the case in the late 1990s, and now we are in a non-recovery stage, a depression.

In 2001, the Bush administration resorted to a "hair of the dog" program for economic recovery. Following the last recession, it seems that Krugman and the Obama administration want the dog to get drunk, too. The government can throw spending and the Fed new money at the economy, but the economy is not going to respond as though it were 1998.

Krugman's call for the Fed to purchase U.S. paper directly also needs to be seen as a destructive scheme. First, the "benefits" are not spread directly. Instead, the new money will fall into the hands of those who either are government employees or are politically-connected. Second, these groups will be able to purchase goods at the OLD prices with NEW money, but as the money is spread through the economy, one can see how the insidious wealth transfers develop. Those who are NOT in the direct money pipeline will see their incomes rising very slowly and consumer price increases will outpace their ability to pay.

In other words, Krugman, for all of his talk about "income inequality," simply wants to change the terms of income inequality. He now wants huge transfers of wealth to groups that are politically-connected to the White House and, more specifically, to the Democratic Party. This has nothing to do with improving the economy as a whole; it is a scheme to benefit some groups at the expense of others -- and I should add that it won't be the "rich," but rather others who are middle class earners who don't have the same Democratic political connections.

Inflation is not a "solution." It is something that only will make things worse. Yes, I guess Paul Krugman would consider me to be an "enemy of the people" for not believing that all of the answers lie in debasing the dollar, but as I see it, the enemy consists of those who tell us the Big Lie that we can inflate our way out of this mess.

Do you want to protest at Ground Zero for our current economic ills? Then Occupy Princeton!!

After reading Paul Krugman's latest anti-Wall Street screed, I have decided that I agree with him on principle: We need to occupy the place that is more responsible not only for the financial meltdown, but for the world depression that has followed it.

That's right, I am calling for an immediate occupation of...Princeton University, and specifically, its economics department. There is no other place on earth that has given us more players and more enablers of the financial madness that has gripped this economy for many years.

First, the chief architect of the depression, Ben Bernanke, was the chair of Princeton's economics department, and it was on his watch that Krugman was hired at Princeton away from MIT, Krugman's doctoral alma mater. Bernanke then went on to a position on the Federal Reserve System's Board of Governors and help create the inflationary policies that followed in the wake of the Tech Bubble of the Bill Clinton years and then the Housing Bubble.

Bernanke always has been a champion of inflation, and one of his first speeches as a Fed governor, "Deflation: Making Sure it Doesn't Happy Here," set out the infamous "Bernanke Doctrine" which claims that inflation can be a cure-all for economic ills. (He and Krugman are of one mind on this subject, as both consider government-generated "money" to be a "free lunch" on which everyone can feast.)

Let us not forget where the "Bernanke Doctrine" (and its predecessor, the "Greenspan Doctrine") has led. If I can restate these doctrines, it would be the following message to Wall Street: "Don't worry about the financial bubbles you create because when you run over the cliff, Uncle Fed will be there to provide you with precious 'liquidity'.

Thus, in his attempt to keep a deep recession from happening, Ben Bernanke has created a depression, and according to him and his followers, the only thing that keeps us in this mess is that Goldstein, er, Ron Paul and others like him, is raising too much hell about the inflation. The only man alive who might have done more damage than Bernanke has been Greenspan, but the combination of the two inflationists has been the destruction of the economy.

Of course, Bernanke (and his alter ego Krugman) are utterly contemptuous of anyone who might think that spreading dollars around the world, bailing out this and that, might not have the desired effects of restoring the economies of the nations. Why would anyone even have the temerity to think that propping up unsustainable capital and directing investment away from those entities that actually are profitable might make things worse? After all, EVERYONE KNOWS that creating more money creates more "aggregate demand," and greater "aggregate demand" means more prosperity.

Second, one of Bernanke's main shills is Alan Blinder, another faculty member at Princeton and a longtime advocate of...inflation. I'd like to say that the current depression has been a case of the Blind (Bernanke) leading the Blinder, but from my perch, it looks as though the whole bunch has been blind from the start.

However, Blinder has managed to do damage not only in backing up Bernanke's inflationary urges, but also in advising the Obama administration on the disastrous "Cash for Clunkers" program. When an economics department is as destructive as Princeton's it is important to spread the destruction to all frontiers.

Third, there is Alan B. Krueger, the Princeton professor who claims that raising the minimum wage will result in...more employment. At his urging, the Obama administration prevailed upon Congress to jack up the minimum wage during a severe recession, with one of the worst results being the record unemployment among young black men. Yes, on one end we have Princeton giving us inflation, and on the other, Princeton making sure more people are out of work, a great one-two roundhouse against the economy.

And then there is Krugman. Yes, the Paul Krugman who advocates the destruction of capital through taxation and regulatory policies. The Paul Krugman who is demanding that the U.S. economy have the capital structure of a Third World economy, but with First World results.

With respect to Albert Einstein, I'd say that this was an economic definition of insanity: Following the disastrous policies of Third World governments, but expecting the results of an economy that welcomes real and profitable capital into its overall structure of production.

Who are the real plutocrats?

In his most recent column, Paul Krugman praises the Wall Street protesters and claims that Republican politicians are in a panic over them.

For example, he paraphrases a quote from Rand Paul. First, this is what Krugman writes:

My favorite, however, is Senator Rand Paul, who for some reason worries that the protesters will start seizing iPads, because they believe rich people don’t deserve to have them.

This is the article from which he got it:

Sen. Rand Paul (R-Ky.) said Friday that he believes the Occupy Wall Street protests stem from divisive rhetoric from President Obama, who has called for the richest Americans to pay increased taxes to help close the budget deficit.

"I see the president's rhetoric of envy inflaming the public and saying, 'Go get yours because rich people don't deserve it,'" Paul said on Fox Business.

Paul said he was worried that the president would stoke the protestors' passions to the point that they could become violent.

"I see it as inflaming this Paris mob that I hope doesn't result in a lawlessness where they say, 'Well, gosh, those nice iPads through the window should be mine and why don't I throw a brick through the window to get them because rich people don't deserve to have them when I can't have them,'" Paul said.

(Actually, Rand Paul does not have to worry, as a lot of the protesters are carrying Macbooks, iPhones, iPads, and other instruments of technology that apparently they are simultaneously claiming are evil. No doubt, these people really would riot if their demands were brought to fruition and they no longer could purchase -- or even steal -- them.)

Indeed, with all of his own anti-enterprise rhetoric, what Krugman has been claiming is that a new war against capital formation somehow would help bring recovery. I don't know how that would happen, but Krugman has been saying that if the government were to sharply raise the capital gains taxes and then replace the coming dearth of private capital investment with government "investment" in things like "green energy," that we then would have a robust recovery.

Let us travel down memory lane to why we had the financial panics in the first place. The government was strongly encouraging banks and financial houses to "invest" in the housing market, and and said that Alan Greenspan needed a "housing bubble" to offset a dearth of private capital spending. And we got it.

This was unsustainable, and the Austrians got it early. Heck, even Krugman understood that this bubble would burst before it happened. (I told Allegany County's property tax board in 2006 that the bubble would collapse and that they should not base future financial predictions on the current situation. They laughed at me and one woman replied, "We don't see that happening.")

There would have been a solution to the financial crisis, and that would have been for the banks and financial entities to submit to market discipline. Don't forget that Krugman has parroted the usual line of "the panic happened because the Bush administration let Lehman Brothers fail."

No, Paul, Lehman Brothers failed because the banks -- operating under the infamous "Greenspan and Bernanke Put" -- were holding securitized mortgage paper that could not hold its value. The government bailed out a lot of the firms that drank the Kool-Aide, and Krugman endorsed the bailouts, which meant that some CEOs could hold onto their mansions in Connecticut.

Furthermore, let us remember that government housing policies drove this bubble and that the easy credit regime from the Fed -- again, done with Krugman's blessings and encouragement -- along with numerous government programs to push people into home ownership and, ultimately, into homes that were too costly for their incomes. For that matter, if Krugman really were against the creation of financial bubbles, then why has he endorsed Ben Bernanke's policies of spreading dollars around the globe to prop up both private malinvestments AND government bonds?

Let us be honest. When the entirety of the housing bubble was exposed in 2008, the banks got their bailouts (and Democratic politicians, and especially Obama, who was financed in part by Goldman Sachs, got their campaign contributions), and the Fed and the European Central Bank responded by creating an even BIGGER set of financial bubbles.

The situation is obvious: the combination of private mortgage AND government debt is unpayable and must be restructured. Krugman's "solution" is for governments and central banks to inflate currency in order to "deleverage" the unpayable debt and to repudiate debt through inflation. (One is reminded of debtors in Weimar Germany paying their debts with wagonloads of paper -- the ultimate Krugman "deleveraging solution.")

In the end, the banks pretty much have become the playthings of American politicians and labor unions, who have become the real plutocrats. We now have a president who declares that HE is the law, and that he can assassinate whomever he wishes, and if the target is an American citizen, the Constitutional right of "due process of law" means nothing. If that is not plutocracy, I don't know what is.

Furthermore, the unions were able to force taxpayers to pony up to bail out General Motors and Chrysler, and then to force bondholders for these companies to stand at the back of the line during bankruptcy proceedings, despite what the law actually said. In other words, Obama and his union allies were able to be their own law, which really is the definition of plutocracy.

Don't forget that a lot of the money funding this "Occupy Wall Street" movement comes from the plutocrat George Soros, along with unions and other organizations tied to the Obama administration. And don't you know that in the upcoming political season, a lot of the firms that presently are being targeted are going to pony up and send millions of dollars to Obama and his fellow Democrats in the guise of "campaign contributions"?

Furthermore, the list of "demands" coming from the "Occupy" movement seem a bit suspicious. The immediate end to use of ALL fossil fuels? Hmmm. Sounds like something that might benefit Archer Daniels Midland and all of the "alternative energy" outfits. Gee, maybe the government could force up energy prices so high that even Obama's favorite company, Solyndra, could become solvent again.

No doubt, the president and his friends would not be facing hardships, but those of us who don't have limousines and drivers to take us where we want to go might find it difficult to get to work or even to eat. What better way to empower the state than to turn everyone into outright serfs who would be totally dependent upon the whims of politicians?

Had the banks been forced to liquidate their toxic holdings three years ago, we would not be seeing these "Occupy" demonstrations. Yes, the recession would have been sharp, but not as destructive as Krugman and others claim, and then we would be in a real recovery now. Instead, we are going to have years and years of high unemployment and social unrest.

Somehow, I think that is what the plutocrat in the White House wants.