Sunday, November 7, 2010

Krugman's Most Embarrassing Comment Ever

With commodity prices soaring, Paul Krugman is in a trap with his deflation call, so he has decided to turn to Richard "I am not a crook" Nixon to explain why price inflation is really not happening.

Krugman tells us to forget about the prices that are going up. They are too volatile, he tells us. He says that what we should focus on are tricky sticky price indexes, specifically, core CPI.

The problem with this is that core CPI was designed at the request of Tricky Dick Nixon to hide real inflation.  Here's the story of what went down:

Kevin Phillips, a political and economic commentator for more than three decades and onetime Nixon strategist, reports that President Richard Nixon asked his Federal Reserve chairman, Arthur Burns, to concoct a new inflation number that would be split off from traditional headline CPI, dubbed “core” inflation—and thus make inflation look less threatening.

Writes Phillips:
Richard Nixon, besides continuing the unified budget, developed his own taste for statistical improvement. He proposed albeit unsuccessfully—that the Labor Department, which prepared both seasonally adjusted and non-adjusted unemployment numbers, should just publish whichever number was lower. In a more consequential move, he asked his second Federal Reserve chairman, Arthur Burns,to develop what became an ultimately famous division between "core" inflation and headline inflation. It the Consumer Price Index was calculated by tracking a bundle of prices, so-called core inflation would simply exclude, because of "volatility," categories that happened to he troublesome: at that time, food and energy. Core inflation could he spotlighted when the headline number was embarrassing, as it was in 1973 and 1974. (The economic commentator Barry Ritholtz has joked that core inflation is better called "inflation ex-inflation"—i.e., inflation after the inflation has been excluded.)
Phillips says in the 1990s, the CPI was subjected to three other adjustments, all delivering a downward bias and all dubious:

*Product substitution: If flank steak gets too expensive, people are assumed to shift to hamburger, but nobody is assumed to move up to filet mignon, he says;

*Geometric weighting: Goods and services in which costs are rising most rapidly get a lower weighting for a presumed reduction in consumption

*And, most strangely, hedonic adjustment: An unusual bit of monkeyshines by which the government says that product improvements in things like computers, cell phones or television actually amount to a reduction in price, so a $2000 laptop with a built in camera is less expensive than a $1500 laptop without one.
This is the index that Krugman has decided to base his deflation case on. Yes, deflation! Even though the manipulated core index is up! I an not making this up. Here's Krugman:
There’s really nothing here to shake my view that deflation, not inflation, is the threat.
Here's the core CPI starting Jan 2009:

Using this sleazy core index, Krugman then divides the PPI by it. Which proves that Krugman once again doesn't understand the business cycle, since coming out of a recession, it will be capital goods prices and raw materials prices that climb first. 

Thus, he is trying to prove his deflation case  by showing what any decent business cycle theorist would understand to be the way you would expect prices to move before you get inflation at the consumer level. In other words, there is nothing in Krugman's analysis that suggest that consumer inflation won't be developing down the road.

The key is really not to watch these mumbo jumbo equations designed by Tricky Paul with the help of Tricky Dick, but to keep an eye on money supply growth, in relation to productivity growth and the consumer desire to hold cash. If money growth is sufficient, it will cancel out any downward price pressures from productivity gains. As for the consumer desire to hold cash, we have been through a wretching financial crisis and business cycle down turn. The desire to hold cash has skyrocketed, it's not going to climb from here.

With Ben Bernanke launching the massive QE2, money supply growth will overpower downward price pressure from any productivity gains, but more important, the desire to hold cash is so high that it is unlikely to climb higher. Thus, the new QE2 money will, indeed, start working on pushing prices at the consumer level higher--there will be no further desire to hold cash to absorb the money. Thus, the coming consumer price inflation will be massive.

One other point, and Krugman is correct on this. There is additional demand for commodities from emerging markets, such as China, But this additional demand will do nothing but push prices even higher, than they are already are.

In short, Krugman has made a lot of dumb arguments, but his argument today may very well prove to be his dumbest, most inaccurate, embarrassing argument he has ever written. In time, I expect economists will be using it as an example of total confusion. It is likely to surpass the embarrassing calls of Irving Fisher, who said just weeks before the crash, "Stocks have reached what looks like a permanently high plateau,"  and the call of New York Fed economists McCarthy and Peach who wrote an entire paper in 2004 explaining why the housing market was not in a bubble.

Yes, write this down. In November 2010, when we are on the edge of huge price inflation at the consumer level, Krugman fears deflation.



  1. Fantastic article! I cannot believe the disinformation that is circulating regarding the dangers of inflation vs. deflation.

    Sure, I understand the problems that arise from deflation, but it is a complete lie that it is worse than the problems that arise from inflation!

    I can only imagine the schemes they are coming up with to make themselves look good/right when the prices rise...

  2. Much of the problem has been caused by the redefinition of the word inflation. Once it simply meant to inflate the money supply. It has been corrupted to price increase = inflation. Price increase is the RESULT of inflation, not the cause. Like Nixon, if prices are looked at one can then blame the problem on greed, Arabs, unions, etc. Everyone except the inflated money supply. Sad.
    Al Sledge
    Big Pine Key, FL

  3. The economics of inflation and deflation so thoroughly defy all logic and reason that it is a total waste of time to even discuss them. Whether from a Harvard Economist or casual observer, the concept, benefits, and means by which we measure the very existence of these things is by and large wrong, misunderstood, and and exercise in rhetoric that everyone pretends to understand but doesn't.

    This is because both inflation and deflation fraud and manipulate natural market movements. That is inflation can cause the price of things to rise without the drivers or increased demand or decreased supply. Deflation can cause the opposite. Neither of these market movements are natural, but rather products of manipulating fiat currencies that have no absolute value of their own. Trying to formulate a plan to "manage" either one is the rough equivalent of putting Superman in to play quarterback when your team is losing in the 4th quarter. In all fairness to Superman, he could probably overcome any deficit, save for the small fact that SUPERMAN IS NOT REAL. So simply by having any real expectation that Superman will somehow change the outcome of a REAL contest, is nucking futs. Yet so-called experts sit around all day contemplating fantasies about how randomly increasing or decreasing the "value" of worthless, valueless paper will improve their reality, and WE GIVE THEM AUDIENCE. Its retarded.

    All the proof you need about how true this is is to look at the housing bubble. THE EXACT SAME experts said there was nothing wrong with an increasing supply tracking step for step with increasing cost. This is fundamentally and categorically opposite the basic concept of supply and demand that these same frauds were teaching students ON THE SAME DAY (at a cost of $500/hr). If you've been to Costco or Sam's Club, you know that if you buy bigger quantities, the price gets cheaper. Yet as our country, GDP, industrial capacity, means of production and efficiency etc have GROWN, prices have gone UP contrary to all logic and reason which would predict a decrease. "But demand has gone up" you say. Right, except that against the price of gold, and actual tangible thing with a tangible value, prices have remained relatively flat over 100 years. So its not even an economic argument. In fact 99+% of what you hear about "economic theory" is not economics at all, its "currency and price manipulation". As this article shows, THIS subject matter is founded completely on lies. When do we cry "Shenanigans!" The cold fact is that most economists are blatantly and knowingly lying or just making crap up 100% of the time.

    When will folks stop listening to words and start GRASPING the CONCEPTS, and stop being victimized by this calculated disinformation and theft of VALUE. This is, after all, what the government is doing to all of us. Stealing VALUE and replacing it with ever-more-worthless MONEY because most everyone is too stupid to know the difference.

  4. All discussions about the "value of money" are fraud. You ARE the means of production. YOU are the value of goods. And you all continue to give away your value in exchange for money that is worth less and less by participating in a rigged game with phony rules instead of just choosing to stop. That will be the revolution after all. It won't be loud or noisy or violent. It will come and go quietly on the day you all choose to stay home and stop giving value to "their" money. Bill Gates, Warren Buffet, The Kennedy's, etc have lots of money. You work in exchange for a very very small share of it, all the while never realizing that you are the one giving it its value. The Kennedy's or Gates' could never singlehandedly do the WORK required to maintain the VALUE of their wealth in dollars. YOU ARE DOING IT AND HAVE BEEN FOR A CENTURY. If you stop, they will have NOTHING. But instead you all go, go, go while letting them dictate the terms at the same time. Including how much new money to print for themselves, while simultaneously endenturing you further to give it its value. This is what the virtues of work and productivity you are taught in school get you. This is why the B&MGF or Maria Shriver urging you to give to charity is the most disgraceful crime ever committed. This is why you are better off killing yourself than trusting the economic decrees of the Criminals in Charge.

    Every word and deed that you have been taught is "right" is the very thing will assure your enslavement. The same thing that has made mankind a big failed experiment. Have a nice fruitless, valueless life making the rich richer...

  5. Peter Schiff has been saying that the real reason for QE2 is an attempt to cover up the lackluster sale of Treasury debt to around the world...If the Fed really wanted to get the banks to lend then it would simply stop paying the banks interest on its reserves. The Treasury Dept and Congress are also thoroughly enjoying the banks buying of Treasuries and the depressed interest rates that come with it.

  6. and, hey, been to the grocery store lately?

    where i am, hamburger is in fact much pricier than many perfectly fine steak cuts. it's a cinch to buy yourself a steak and grind it up into hamburger, making a cheaper, less fatty, better-tasting meal.

    so as hamburger (not flank steak) rose in price, did we substitute "down?" and if so, to what? well you don't have to guess, because i sure as hell didn't, and i don't imagine anyone else who shops for themselves is that dumb, either.

    it's such a no-brainer to substitute "up" to sirloin and just eat steak instead of sticking with hamburger that it takes either a war-criminal-in-chief or a propagandist-at-large to not see it. no brain, indeed.

  7. Krugman is right. Deflation IS the "threat" - but that doesn't mean it will happen. That's why Bernie is hell-bent on IN-flating. The problem is that Bernie is the proverbial sorcerer's apprentice. He has no clue what he is doing or how it's going to turn out, and he won't be able to stop it when it gets completely out of hand.