The Krugman Shift

Paul Krugman is terrible when it comes to theory, but get him close to the data, and he is one of my favorite data hounds, and it appears he is beginning to sniff trouble in the economy.

Bob Murphy points out that Krugman may be moving away from his recovery stance.

In a recent blog post, NYT columnist and Nobel laureate, Paul Krugman features some analysis by Michael Shedlock and his takedown of ECRI's supposed track record in calling the beginnings and ends of recessions. Krugman then writes:

...this is a really, really bad time to be relying on conventional indicators.Why? Basically, because in a zero-interest rate world — the three-month rate was .066% last I looked — especially one that’s suffered from a collapse of the shadow banking system, conventional indicators don’t mean what they usually mean. Increases in the monetary base aren’t especially expansionary. The yield curve more or less has to slope up, even if no recovery is expected. And so on.So historical correlations, to the extent that they exist — and as Shedlock points out, ECRI is claiming a much better record than it really has — can’t be counted on to prevail...So historical correlations, to the extent that they exist — and as Shedlock points out, ECRI is claiming a much better record than it really has — can’t be counted on to prevail

Murphy asks, Is Krugman Chiseling Out His Escape Chute [from his recovery forecast]? My guess is yes, and that it will become more obvious that Krugman is doing this as the weeks move on.

I fully expected this to happen. Just last week, I wrote:

Krugman knows things are bad, and when the double dip is real obvious, I think he will be one of the first to confirm. I will await for Krugman to confirm the accuracy of my current forecast by late December/ early January. What will the double dip look like, almost all indicators will start to nosedive,again. It will not be pretty.

It is also interesting to note that Krugman finally gets that the Fed isn't printing money. That's what he means when he writes:

Increases in the monetary base aren’t especially expansionary

Of course, the fact that the monetary base has not resulted in a multiple effect growth in money supply has been a topic at EPJ all summer.

Notice also that he says it is a bad time to be relying on conventional indicators. Well said, Paul. I have been saying as much for sometime, most recently, regarding the Fed Funds rate:

Those who are looking simply at the current near-zero Fed interest rate simply do not get that Bernanke's new "tool," which allows him to pay interest on balances banks keep on deposit at the Federal Reserve, has pretty much neutralized the Fed funds rate as a money creation tool. Keep you eyes on what the Fed is paying on the excess reserves and any significant decline in excess reserves, that will signal that the Fed is money expansionary again.

Then, Krugman rejects econometrics. Yup. That is the only way to understand this comment from him:

So historical correlations, to the extent that they exist...can’t be counted on to prevail. There’s really no alternative to making fundamental analyses of the macro situation.

To the extent they exist? Whoa!! He's dissing econometrics. Of course, I am the king of dissing econometrics.

Krugman's coming along. I wonder what he is reading that is causing his shift?