Rage Against the Fraud

When I was teaching in secondary school 30 years ago, I explained to my students how the Fed engages in open market operations and how the Fed expands and contracts what we call the monetary base. I had not been pushing gold, silver, or any other commodity, but one of my students was puzzled.

"What backs the money?" he asked. "Debt," I replied. He and the other students looked at me with astonishment, as they understood instinctively that debt had "value" of dubious worth, and that such a system meant the government could expand the monetary base into oblivion. At that moment, they understood that the USA had essentially a fraudulent monetary system. And, yes, they showed anger, lots of it.

Paul Krugman would have thought them to be a bunch of crazies. Money, after all, is nothing more than a tool that aids a "social system" and that governments can and should manipulate its supply and its value over time in order to help achieve certain social "goals." Anyone who thinks differently, according to Krugman, is certifiably crazy, a nut job.

While he does not explicitly endorse the newest rabbit-from-the-hat scheme in his most recent column, nonetheless he says that it might be necessary because "crazies" in Congress (some Republicans) believe that we cannot continue to borrow money forever and want President Obama to put a lid on spending scheme. Now, I am the first to say that many of these Republicans are delusional but for a different reason than what Krugman claims.

Most Republicans are "hawks" when it comes to U.S. military adventures overseas, and that has been painfully apparent in the discussion over the nomination of Chuck Hagel for U.S. Secretary of Defense. While a U.S. Senator, the Nebraska Republican spoke out against the vast expansion of military spending and the wars in Iraq, Afghanistan, and elsewhere. He also denounced the beating of war drums against Iran, something that has incensed many conservatives who apparently are itching to bomb Tehran and expand U.S. Middle East wars.

I cannot denounce the rightist mindset on war enough. The same people who once decried Soviet military spending now are blind to the fact that even though the USA spends more on its military budget than the rest of the governments of the world combined, that isn't enough, and that any cutback, no matter how small, means that "we are not safe."

Yes, I think it is good that the Republicans at least are talking about entitlements, although I wish they would also deal with the agricultural subsidies and all of the other corporate welfare that has their fingerprints all over it. Since the Democrats have "discovered" that a lot of military spending also comes in the form of welfare, they definitely have become less vocal in their historical opposition (at least following the Vietnam War) to Pentagon spending.

In other words, I don't look at the Republicans as the "good guys" seeking to be financially responsible when, in fact, they are a major part of the problem. However, Krugman denounces the Republicans not for their hypocritical stance on military spending, but rather because they are even asking the hard questions on whether or not we can continue this "borrow-from-Peter-to-pay-Paul" finance scheme. As Krugman sees it, the irresponsibility is not in those that seek to spend and borrow as through the future does not exist, but in those that say we have to stop this madness.

So, what does he do? He endorses what essentially is a money-printing scheme to get around the hard choices and hard discussion. Are we borrowing 40 cents for every dollar the federal government spends? No problem. Just strike a coin with an announced "value," and that will take care of everything. Continue the financial shell games as though one day the economy magically will turn around, get "traction," and then prosperity will return.

I'm on a list serve with a number of Austrians, and one person, a writer and editor, had this to say, and I believe his words are spot on:

The really amazing thing to me in all this is how EVERY commenter I'm seeing, savvy political or supposedly serious economist, acts as if the actual real physical economy where real goods and services are produced seemingly doesn't play into this at all---this debate seems to me to be revealing an apparent actual lack of understanding that money is not the same thing as wealth.

The only way it doesn't reveal that is if -- and this is what i'm trying to be sure I understand -- the trillion dollar coin solution is NOT economically significant if we are already in a world of fiat money. That is, a sort of, "Well, if you accept fiat money at all, this coin nonsense is just as good a means to make money from nothing as any other."

Keynesians would denounce this person as being a rube, an ignoramus, someone who does not "understand economics." Yet, the opposite is true. He is not the one who is delusional. People who pretend that we can spend as though we are much wealthier than we really are truly are the people who are deluded.

Maybe the Stimulus-Bearing Space Aliens will have iPhones

I believe I owe Paul Krugman an apology, for I have written in the past that Keynesians do not have a theory of capital. I was wrong; Keynesians do have a capital theory: it is called More Spending.

Now, this is not a theory of capital like that developed by the Austrian School, beginning with Carl Menger. Instead, it is a theory that says that the construction and addition of capital to the economy is useful mainly in the amount of short-term spending that it brings. Thus, the actual performance of new capital takes a back seat to the fact that when business enterprises purchase the capital, they spend money, and it is that short-term spending that is significant.

For those who might argue differently, Krugman lays out his view in his column that claims the new iPhone will provide "stimulus" to the U.S. economy. True, it seems that others also have drunk the Kool-Aide, and others seem to be even more enthusiastic about this latest rendition of the "Broken Windows Fallacy" than even Krugman (although he does seem to buy into the concept):

A recent research note from JPMorgan argued that the new iPhone might add between a quarter- and a half-percentage point to G.D.P. growth in the last quarter of 2012. How so? First, the report argued that Apple was likely to sell a lot of phones in a short period of time. Second, it noted that although iPhones are manufactured overseas, most of the price you pay when you buy one is domestic value-added — retailing and wholesaling, advertising and profits — all of which counts as part of G.D.P. Finally, it took some plausible guesses about the price of each phone and the number of phones sold, and used those guesses to make an estimate of the impact on G.D.P.

It’s all pretty straightforward. But the implications are wider than most people realize.

The crucial thing to understand here is that these likely short-run benefits from the new phone have almost nothing to do with how good it is — with how much it improves the quality of buyers’ lives or their productivity. Such effects will kick in only over the longer run. Instead, the reason JPMorgan believes that the iPhone 5 will boost the economy right away is simply that it will induce people to spend more.

 Once again, we see the most important element of economic thinking go missing: opportunity cost. The money that people will spend for new iPhones is money that will not be directed in the purchase of other goods. We do not have new "spending" arising from nothing; what we will have is a redirection of how people spend their incomes.

Not surprisingly, Krugman does not end at that point. If you believe in the "iPhone stimulus," he crows, then you believe that more government spending will boost the economy. But, hey, why even stop there?

Why not go whole hog and hope that the invasion of the space aliens comes complete with the Little Green Men stopping at the Apple Stores and elsewhere to buy the iPhones before they set out to destroy the earth. However, if that is their plan, then we should not resist the invasion because doing so would invoke "weaponized Keynesianism," and Mitt Romney supports that, so it must be bad. (Actually, it is bad, but not because Mitt likes it. Yes, Paul, there is more to life than partisan political thinking.)

No, we should not resist because after the Little Green Men With iPhones destroy the earth, we then will have the Ultimate Keynesian Stimulus of rebuilding just about everything. As Krugman writes:

Yet depressions do end, eventually, even without government policies to get the economy out of this trap. Why? Long ago, John Maynard Keynes suggested that the answer was “use, decay, and obsolescence”: even in a depressed economy, at some point businesses will start replacing equipment, either because the stuff they have has worn out, or because much better stuff has come along; and, once they start doing that, the economy perks up. Sure enough, that’s what Apple is doing. It’s bringing on the obsolescence. Good.

The Little Green Men With iPhones could accelerate that process, all to the better. In fact, I will slightly change Krugman's next paragraph to demonstrate exactly what I mean:

But why suffer through years of depressed output and high unemployment while waiting for enough obsolescence to accumulate? Why not have the government Little Green Men With iPhones step in and spend more, say on education and infrastructure, to help the economy through its rough patch? Don’t say that the government Little Green Men With iPhones can’t add to total spending, or that government spending can’t create jobs. If you believe that the iPhone 5 can give the economy a lift, you’ve already conceded both that the total amount of spending in the economy isn’t a fixed number and that more spending is what we need. And there’s no reason this spending has to be private.

So, all it takes for us to experience new stimulus is for E.T. to phone home. If he does it with an iPhone, all the better.