Monday, May 2, 2011

Understanding Why Ron Paul Knows More About Inflation Than Does Paul Krugman

UPDATE: I see where Paul Krugman has referenced this article in one of his blog posts at NYT. Please be sure to return to EconomicPolicyJournal.com's front page, where I will shortly respond to Mr. Krugman.

Bob Murphy has sent me an email with a link to a Krugman post, and also left the same link as a comment at another post here at EPJ, so I am guessing he would like me to comment on the latest Krugman confusion. And so I will, while dedicating this post to the Murph.

Krugman writes:
WSJ: Commodity Surprise: Some Are Now Heading Down.The first thing to note about Krugman's post is that it shows why Ron Paul is a better economist than Krugman.

Good reporting on the slumps in cotton, copper, etc. But why, exactly, is this such a surprise?

Real commodity prices — that is, prices relative to the prices of goods that aren’t as volatile — have gotten very high by historical standards.

Some of this probably represents a long-term upward trend, as emerging economies place pressure on limited resources, but even so, you wouldn’t expect continued rapid rises, and in fact you should expect some regression toward normal levels as supplies and to some extent demand respond.

The only reason to believe that commodity prices would continue to soar would be if you thought that they were the harbinger of runaway inflation. But they aren’t.

So if commodity prices come down, and headline inflation declines back toward core, we’ll see the inflationistas admit that they were wrong, right? Also, pigs will fly
Notice his argument for why commodity prices should be comimg down:
Real commodity prices — that is, prices relative to the prices of goods that aren’t as volatile — have gotten very high by historical standards:

Some of this probably represents a long-term upward trend, as emerging economies place pressure on limited resources, but even so, you wouldn’t expect continued rapid rises, and in fact you should expect some regression toward normal levels as supplies and to some extent demand respond.
The question to Krugman has to be says who? Why do markets have to move toward some "normal" level.

I was fortunate enough to meet Murray Rothbard three times in my life and I can distinctly remember one coversation we had, which took place just as Paul Volcker was tightening interest rates. Interest rates had started to climb and the mainstream argument was that the rates were pretty high already and would likely show some regression to normal levels and not go higher. Rothbard's response to this mainstream return to normal mumbo jumbo was "Says who?" He knew, of course, that there are no constants in the world of economics and that prices can move dramatically to new levels rather than return to some kind of "normal". At that particular point, with Volcker tightening, Rothbard understood that interest rates were likely headed much higher. And, was Rothbard ever right, after the conversation we had, short-term rates climbed another 600 basis points to over 15%.

This is one of the points I was trying to make earlier in my post. On the Road with Ron Paul, Dr. Paul understands that a "regression to normal" is nonsense and that markets can occasionally move dramatically higher:

We went on to discuss the current state of the dollar, price inflation and so on. I found his understanding of markets remarkably sophisticated. At one point, he said to me, "You know, these markets can all very rapidly just take off and the dollar can collapse and prices climb very rapidly." For emphasis, he moved his hand horizontal and then quickly vertical.

In my many years of trading and talking to investors, one of the most difficult concepts to get across is how quickly markets can change and move dramatically. Most people tend to think of investments as trading within ranges or a slow move in one direction or another, not quite realizing that the moves at times can become very spectacular. Ron Paul seemed to understand this possibility very clearly.
In my post I made clear that most don't understand this. Krugman clearly falls into the range bound camp. If Krugman were to ever try to manage a hedge fund with that range bound thinking, he would end up just like the range bound thinkers at Long Term Capital Management, and blow up his damn hedge fund.

The further problem with Krugman's analysis is that he mixes commodity prices with consumer prices. Notice what, he writes:
The only reason to believe that commodity prices would continue to soar would be if you thought that they were the harbinger of runaway inflation. But they aren’t.

So if commodity prices come down, and headline inflation declines back toward core, we’ll see the inflationistas admit that they were wrong, right?
Headline inflation is about consumer prices not commodity prices. Because Krugman doesn't understand Austrian economics, he tends to aggregate all prices together. For him, all prices in the aggregate move together, which is a tautology that takes the richness out of the data. Austrians don't make this mistake. They understand that when new money enters the system, it enters the capital goods sector and the raw commodities sectors first. Only later, does it works its way to into consumer prices.

It is the inflation from earlier money printing that is now starting to hit the consumer sector, Krugman will never spot this by looking at commodity prices. Krugman has his eye on the wrong part of the ball park. He is watching the grounds crew move off the field and is not watching the stands fill up. He is declaring the game over before it even starts.

The new Fed created money, as I have been warning, is already in the system. It is just now starting to heat up consumer prices and will heat them up even more in the second half of this year. As for commodity prices pulling back a little, that should come as no surprise. I have been warning in my EPJ Daily Alert that three-month annualized money supply (M2) growth has pulled back from 7% in the last quarter of 2010 to 5%, in the first quarter of 2011. I expect the trend is most likely higher  for money supply growth from here, so I expect that most likely the trend for prices at the commodities level will be higher. My view, though, could change if the money supply growth numbers head downward. But the price inflation at the consumer level will continue to increase, creating  more egg over Bernanke's face.. It  will become obvious that Krugman has failed to differentiate between price inflation at the capital and raw goods level and at the final product consumer level.

Ron Paul sees the problem ahead. Krugman is stuck in some kind of aggregative, Keynesian world that will only cause him more pain agony and embarrassment. Do pigs fly? No they don't, but prices sure can. Krugman will prove correct about his understanding on the lack of flying capabilities of pigs, but he will be way off on the price of bacon, because the price of bacon can really fly and never ever "regress to norm".


69 comments:

  1. Desolation JonesMay 3, 2011 at 4:05 AM

    "Headline inflation is about consumer prices not commodity prices. Because Krugman doesn't understand Austrian economics, he tends to aggregate all prices together. For him, all prices in the aggregate move together, which is a tautology that takes the richness out of the data. Austrians don't make this mistake. They understand that when new money enters the system, it enters the capital goods sector and the raw commodities sectors first. Only later, does it works its way to into consumer prices.

    It is the inflation from earlier money printing that is now starting to hit the consumer sector, Krugman will never spot this by looking at commodity prices. Krugman has his eye on the wrong part of the ball park. He is watching the grounds crew move off the field and is not watching the stands fill up. He is declaring the game over before it even starts."


    How long is this lag that you imply between commodities and cpi supposed to be? How much later?

    If you look the rate of change of commodity prices and cpi, they tend to more or less move in tandem as Krugman suggests. As commodities falls, cpi falls pretty much at the same time. As commodities rise, cpi does as well without much lag. In 2008 when commodities reached their peak price and then started falling sharply, why didn't CPI keep on moving up seeing how the effect of new money is seen in consumer prices only after it enters commodity prices as you say? Instead, consumer prices fell almost at the same time as commodities did. Maybe you're right that new money does enter commodities first, but it seems to me that the new higher price (or lower price) of commodities end up being reflected in consumer goods rather quickly.

    http://research.stlouisfed.org/fredgraph.png?g=mR

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  2. @Desolation Jones, where is the correlation in that graph you showed? Also, how are we supposed to see a lag in a chart with an x axis of 25 years?

    "In 2008 when commodities reached their peak price and then started falling sharply, why didn't CPI keep on moving up seeing how the effect of new money is seen in consumer prices only after it enters commodity prices as you say?"

    Because the credit crunch that happen at the end of 2008 was not (directly) due to Fed money printing (it was due to the conditions that created during the years the Fed money printing), so you dont see that effect. Isnt this obvious?

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  3. Austrian critics need to understand the difference between the basic qualitative Austrian analysis and any subsequent quantitative statistical/evidentiary analysis. When money is created ex nihilo, the persons receiving this new money are in effect stealing the purchasing power of those holding the old money. They are acquiring goods and services to which they are not entitled and making the supply of those same goods and services smaller for everyone else. This will distort the pricing process because people will not know if prices reflect actual time preferences and wants of purchasers or were merely the result of new funny money bidding up prices. This distortion of the pricing process in interest rates and all other prices results in malinvestments.

    Where the money has gone and when and where it will appear as price inflation is always a question of fact based upon the particular circumstances. General price inflation may not appear at all or may appear limited to different assets, goods and services while other prices may decrease. The fact that a particular Austrian-based writer makes an incorrect prediction about the future of price inflation says absolutely nothing about Austrian theory in general. I find that Austrian critics do not understand the difference between the underlying distortions caused by funny money dilution and the subsequent price inflation. They are not the same and Austrians are always aware of the differences.

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  4. We need to stop acknowledging Krugman's existence. It's obvious he's a clown so stop being a part of the circus.

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  5. December 14, 2011, 2:17 PM
    Speaking of People Whose Models Have Failed

    http://krugman.blogs.nytimes.com/2011/12/14/speaking-of-people-whose-models-have-failed/

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  6. Aaaaaaaaand seven months later reality bitch-slaps Austrian economics yet again. You and Ron Paul were wrong. Maybe the reason you need to stop acknowledging Paul Krugman's existence is that he keeps embarrassing you.

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  7. How does crow taste?

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  8. Here, in the fullness of time, the clown Krugman is laughing at you buffoons, and so am I. http://krugman.blogs.nytimes.com/2011/12/14/speaking-of-people-whose-models-have-failed/

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  9. So how did this article's prediction turn out? Did that inflation finally kick-in as predicted?

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  10. The kingdom fails when the jester (PK, according to some comments) is right about most things and the king (the politicians) are wrong about those same things. So sad.

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  11. Ron Paul sure looks smart today, doesn't he? And Krugman, what an idiot!

    Watch with me as inflation and interest rates go through the roof.

    Sure are idiots out there!

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  12. Care to revisit this? It's December and Krugman was right and Ron Paul was -- well he was wrong as usual.

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  13. Heh. It's the end of 2011 and there's no inflation in commodity prices. In fact, they have fallen.

    So yet again it shows 'Austrian' economy wrong.

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  14. Bob, I've read your stuff on and off for a few years now and Its become quite clear you have a semantics problem... Either you do not understand context clues (and how to use them in a conversation) or you are intentionally misinterpreting statements to demagogue.

    "regression toward normal levels as supplies and to some extent demand respond."

    This is clearly referring to the "normal" of HIS MODEL, as compared to the temporary spikes in commodity prices he is trying to show. It is NOT a reference to some universally recognized "normal price level" as you disingenuously suggest to your readers.

    But moving on...

    "But the price inflation at the consumer level will continue to increase, creating more egg over Bernanke's face.. "

    Where is the egg????

    "The new Fed created money, as I have been warning, is already in the system. It is just now starting to heat up consumer prices and will heat them up even more in the second half of this year."

    Are they hot?... how hot?... did M2 fall dramatically? Will pigs fly?

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  15. So Austrians, when is your inflation coming? There is only 17 days left in the year! Maybe in 2012? How about those low treasury interest rates? And "funny" money is the Euro nowadays and it's quasi-gold standard approach to managing macroeconomic shocks. I guess they should change the name into "Austrian" from Euro. Maybe then we would see improvement?

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  16. No. Krugman mentions "commodity prices". And Krugman mentions "headline inflation". And he clearly means two different things, though related. Jaybus, given reading-and-comprehension skills this defective, no wonder Econ101 was a non-starter for you people.

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  17. Too bad events have proved you, and Paul, massively wrong. I should delete this page if I were you. Maybe nobody will notice...

    Oh, too late, it's back in Krugman's column. Your, and Paul's, embarrassment made manifest once again...

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  18. So, where's your inflation?

    Price inflation at the consumer level continued to not increase, creating more egg over Ron Paul's face.. (and yours too) It has become obvious that Austrians have failed to predict anything correctly.

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  19. Krugman was right and you were wrong. Pull down this ridiculous website.

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  20. How's this prediction working out for you?

    Remember, the Reality has a well known Liberal Bias

    Rule #1: Remember that Paul Krugman is right.
    Rule #2: If your analysis leads you to conclude that Paul Krugman is wrong, refer to rule #1.

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  21. I will be very interested to see how you could possibly argue that you are right and Krugman wrong.

    Here is your key prediction:
    "It is just now starting to heat up consumer prices and will heat them up even more in the second half of this year. As for commodity prices pulling back a little, that should come as no surprise. I have been warning in my EPJ Daily Alert that three-month annualized money supply (M2) growth has pulled back from 7% in the last quarter of 2010 to 5%, in the first quarter of 2011. I expect the trend is most likely higher for money supply growth from here, so I expect that most likely the trend for prices at the commodities level will be higher. My view, though, could change if the money supply growth numbers head downward. But the price inflation at the consumer level will continue to increase, creating more egg over Bernanke's face.. It will become obvious that Krugman has failed to differentiate between price inflation at the capital and raw goods level and at the final product consumer level."

    It has become obvious that YOU were wrong, my friend. The egg is on YOUR face, not Krugman or Bernanke's.

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  22. The link to the front page in your "Update" paragraph is broken.

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  23. where is that inflation?

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  24. Well, that forecast didn't work out too well for you. Second half of 2011 is about over and Krugman was right (no inflation) and you were wrong (predicted inflation didn't come).

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  25. If my understanding is correct, the market moves remarkbly fast, but not in the transition of commodity prices to consumer prices?

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  26. Still waiting for the hyperinflation... or any inflation...

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  27. Krugman seems to have the last laugh on this one.
    Commodity prices are down at year end. As he predicted.
    http://krugman.blogs.nytimes.com/2011/12/14/speaking-of-people-whose-models-have-failed/

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  28. Ha Ha Ha Ha! Pretty funny. Throw more spaghetti against the wall, maybe more will stick

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  29. So, seven months on, are you bozos ready to admit that it hasn't played out as you claimed? (i.e. it smells an aweful lot around here like you and RP were wrong and PK seems more and more right all the time)

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  30. "The fact that a particular Austrian-based writer makes an incorrect prediction about the future of price inflation says absolutely nothing about Austrian theory in general. I find that Austrian critics do not understand the difference between the underlying distortions caused by funny money dilution and the subsequent price inflation. They are not the same and Austrians are always aware of the differences."

    How are we laymen supposed to know when the Austrian model is making a good vs bad prediction? What does this say about the objective value of the model?

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  31. "The question to Krugman has to be says who? Why do markets have to move toward some "normal" level"

    It's, uh, called regression to the mean.

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  32. "The new Fed created money, as I have been warning, is already in the system. It is just now starting to heat up consumer prices and will heat them up even more in the second half of this year."

    WHOOPS... http://bpp.mit.edu/usa/

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  33. Still waiting for that runaway inflation?

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  34. Actually, money is created under the aegis of the Federal Reserve, not by them. The banks create money by lending and, by taking the lent and spent money as deposits, are able to lend and thus create more money. The Treasury hasn't created money since 1971, the last time United States Notes were issued.

    [The only exception to this is the temporary creation of money to buy Treasuries, instead of using deposits, a gambit called Quantitative Easing. When the Treasuries come due, taxpayer money goes to the Fed instead of the bondholders and is thus retired.]

    As far as the movement of price inflation through the economy, that depends upon who is getting paid with the new money. Credit card debt money would therefore immediately impact consumer goods prices, the new money allowing consumers using it to outbid other consumers without access to such money. A similar directed inflation (my usage) causes health insurance money to first inflate doctor and hospital fees. It would take new money used in commodities market to directly bid up commodity prices. The "Austrian view" would then be an assertion that high finance debt money creation goes toward commodities markets and capital goods directly.

    Another point to consider is deflation from a decline in lending to consumers and their repayment of old credit card debt. This can and, I suspect, did occur at the same time as quantitative easing and easier money to investment banks and insurance companies. One would then see what appears to be a lengthening lag when what is actually happening is the creation of money in one market and the destruction of money in another.

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  35. Rick Perry also thought Ron Paul was a brilliant economist because:

    1. He's "really intriguing"
    2. The Fed can only do evil
    3. .... oops.

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  36. Hmmm, you said;

    It is just now starting to heat up consumer prices and will heat them up even more in the second half of this year...the trend for prices at the commodities level will be higher. ..the price inflation at the consumer level will continue to increase, creating more egg over Bernanke's face.. It will become obvious that Krugman has failed to differentiate between price inflation at the capital and raw goods level and at the final product consumer level.

    Sure looks like you were wrong. How do you spin "wrong?"

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  37. All you have to do is answer one question, why were you wrong about inflation picking up at the end of 2011? Do you have to rework the math and come up with a new date, or are you going to be honest and say you don't have a model and you just pulled the end of 2011 out of your @$#?

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  38. Haha! Go on all, sweet dreams... yes, inflation is coming b/c Gentle Ben has a printing press and he's willing to use it.

    There is no last laugh, only a latest laugh.

    Do you think today is the end of all problems? Bitter inflation doesn't need to come, it is already here! It has been here for a decade. Try traveling a bit from your front porch.

    Gas: I just paid $4 gallon (NY). Italy, I paid $9 gallon. France, Switzerland, Germany, the same. Japan $6 gallon.

    Plane ticket to Europe a few years ago, bargain, $400, now? $1400. Free bags on domestic? No way. Meals on flights? If you pay.

    Same for flights to Asia, no deflation there.

    Sheetrock, concrete, stones, building materials, all up.

    Car parts, O2 sensor, timing chain parts, mass air flow, exhaust parts have doubled, tripled, quadrupled and even quintupled in price.

    Food bill, up, way up.

    Ben and Jerry's Ice Cream, last year on sale for $2.50, two years ago $2, yesterday on sale? $3

    Car insurance, two cars, no tickets, no accident (GEICO) last year, $150/month, new premia? $170.

    Property taxes? Up. Rents? Up.

    My house (purchased two years ago) appraised higher this year (granted, I picked a great neighborhood. I recognize housing is bad in other places). So, other than housing (and granted that's a big one if you haven't already bought)...

    Where is your deflation, haterz?

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  39. Yes, you certainly do seem about as well qualified as Ron Paul to pontificate on economics.

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  40. Sure are a lot of comments here critical of this EPJ post; most claiming that the author and Ron Paul were manifestly wrong on their economics. But the protestors miss the point of right-wing economists. They respond to ideology, not facts. In their world, slashing government spending, de-regulating the economy and repealing the New Deal are goals, not a means to a stronger economy.

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  41. Gotta love all the Krugman trolls in here. The only reason why inflation isn't sky rocketing is because the rest of the world keeps buying up our treasury bonds. They see the United States dollar as a safe haven and thus the dollar continues to rise relative to the Euro. Once our fiscal house starts to collapse, people will start dumping the dollar, inflation will rise, banks will begin to fail and the helicopter Ban will print.

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  42. To "Gotta love all the Krugman trolls in here..."

    Note the "Once our house fiscal house starts to collapse ..."

    Ever notice with these GOP crazies that their predictions are always just that -- in the future ... never mind the record low interest rates, the negative real ten year interest rates on bonds, deleveraging shock after yet another financialized bubble-economy bubble burst, and the need for macroscale stimulus ...

    Yes, we do in fact love the Krugman trolls in here -- because Krugman gets it and is totally right while you are living in some horsesh/t 19th Century dream-world. Get a clue.

    And that doesn't mean writing an incoherent screed about Zimbabwe and blackhawk helicopters filled with punctuation errors.

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  43. I do want to ask:
    If the people are buying the dollar now because of "failures in the Euro", where are they going put their money?

    Yen? The Pound?
    ...doubt it.

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  44. "Krugman trolls"... Isn't there a requirement that you be right about *something*, *ANYTHING!* before you can be mean to folks? There should be...

    Your reasoning is circular: the fact that Da Invisible Hand Uv Da Markets keeps our inflation low means our inflation *is* low. You don't get to argue it "should" be high, if only Da Markets wuz smarter, like da Ron Pauls.

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  45. But I thought that the collapse of the US fiscal house will lead to a severe recession. Why should we have inflation in this case? Could you let me know which model you are using?

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  46. Inflationista number 1December 15, 2011 at 3:30 AM

    I was just a tiny bit wrong about my prediction: it is not at the end of 2011 that inflation will soar, but around june 2012.

    See you then!

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  47. Regarding your Volker argument about inflation, you've missed the difference between double digit Stagflation of the 70's to early 80's with the current conditions that more resemble the 1930's.

    Paul Volker killed runaway inflation by cutting off the money supply and creating a steep 2-3 year recession. As soon as inflation fell to -normal levels- Volker flooded the economy with money to get the economy out of recession, and it was "Morning in America" as Reagan said. Incidentally, Jimmy Carter's economic reputation was ruined by this, even though he was the one that got Volker to do the job. It was a gutsy move, but cost him the election.

    The situation today is poles apart from the 1970's. America is in a liquidity trap. The Fed can't lower interest rates as it would in normal recessions to get the economy moving (see Volker above) and investment, spending & demand are flat. The government needs to step in temporarily to employ the unemployed, which causes business demand to rise in addition to helping the unemployed survive. Increased business demand means more private hiring, and soon enough the government can pull back as the private sector takes over. Currency circulation and increased demand also increases tax revenue, which can then be used to pay off the debt. Note that this has the same effect during a liquidity trap as having the Fed lower interest rates during a normal recession--it increases business investment and money in circulation.

    The reason that it's needed now is because the Fed can't lower interest rates much past zero, because at that point it becomes a negative store of value, and the purchasers of T-bills that keep the Fed afloat would then do better by stuffing their mattresses with their cash.

    Paul Krugman has gone over all of this dozens of times. Because interest rates and demand are low, government spending is NOT competing with private investment, which is also low. Companies are buying back their stock, not making big investments in their future. And because of all this, spending, stimulus and more money in circulation has not and will not result in raising core inflation, and even the more volatile volatile headline inflation has receded as Krugman showed in his article.

    Look at how much more spending the Fed and the government have had since the crash. TARP, the stimulus, unemployment compensation extensions, taxes for the wealthy not being phased out ($100 Billion/year,) the $5 Trillion the Fed secretly spent to bail out the banks, another $5.4 Trillion spent to prop up the foreign currency exchange in 2008, yet interest rates are at zero percent! Krugman is right, and Ron Paul & you are stuck in the 1970's.

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  48. Austrian economics ignores empirical evidence as a premise, it’s about apriorism.
    That’s just stupid since economics is an applied science and as such it must rely on data.

    Every serious economist know that Ron Paul is a joke anyway…

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  49. Krugman predicted deflation. EPJ predicted inflation.

    Inflation is currently running around 4% YoY.

    EPJ was right. Krugman was wrong again.

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  50. Anonymous at 8:46AM posted that inflation was 4% this year while Krugman was predicting deflation and therefore "PJ was right. Krugman was wrong again."

    In fact, core inflation as measured for the 12 months ending in November was 2.9%. That aside, Krugman has repeatedly argued that wages and prices are very "sticky" and that deflation is therefore a very hard -- and highly undesirable -- situation to be in. He also argues that this is precisely why the German government's all-austerity program for the peripheral countries of Europe, including biggies such as Italy and Spain (which had no budget deficits before the euro mess with the 2008 economic crash) combined with a zero inflation rate in Germany proper is a recipe for further economic disaster.

    He also would be happy with a 3 to 4 percent inflation rate per year if it were coupled to real economic growth that lifted real wages -- a situation that existed from the 1940s to the late 1960s. That's precisely his point since it decreases the value of a given amount of debt over time and helps the debtor class even while real economic growth continues.

    He further argues that deficit spending and increasing the money base in a liqudity trap will not cause hyper-inflation.

    At its heart, and counter to what too many Americans believe, money is just a medium of exchange -- it does not have some sacred value given to it by God or a bar of gold.

    I realize this argument will be lost on EPJ-type devotees, but this is his worldview and the actual facts bear this out far more than views stated here.

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  51. Krugman said Paul has been wrong about everything.

    We have posted links to Paul in February 2000 (Nasdaq), 2002, 2005 (Housing), 2007 (inflationary short-term boom) and 2008 (crash) showing that Paul in fact got everything right.

    We have also posted his investment portfolio which shows fantastic gains since 2008.

    Krugman owes Ron Paul a big apology.

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  52. The reason that any one set of prices will tend to converge back to the trend in core prices is simple math. If one set of prices in one set of goods trends upward from the rest, then either spending on the rest must be cut (income effect) or spending on the expensive set of items must be cut (substitution effect) or both. To the extent that there are necessities among the core items, there is a downward limit to how much spending on those items can be cut. Substituting away from the goods with upward-trending prices will mean less demand, and so less upward price pressure.

    Extending the notion that one set of prices can rise faster than all others for an unlimited period eventually gets us to the point that all spending goes toward the goods with rapidly rising prices - pretty much an impossibility. If upward divergence in prices can't go on forever simply because of math, then Krugman's point holds. Nothing in either the substitution argument or the realization that all income will go to a single group of goods if their prices rise faster than core goods for too long is new. These ideas are available to anyone who is willing to do a little reading. Anyone who is not familiar with these arguments is in a pretty weak position to be making strong claims about how inflation works.

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  53. Jeff - To me it appears that the major disconnect amongst Krugman and those who listen to Ron Paul is where is the government going to get the money to 'stimulate' the economy as you suggest? The only way to come up with this money is by borrowing or printing. Folks that listen to Ron Paul generally recognize that we are already suffering from the consequences of too much borrowing and printing. The artificial creation of credit, the blowing of asset bubbles, and other centrally planned endeavors have already significantly distorted the economy and ballooned the debt burden. Making matters worse, instead of allowing the marketplace to adjust to these distortions via liquidation and other means, the central planners have used government policy to further and prolong these distortions. Inevitably it is the powerful interests who push for these programs, bailouts, and the like because they have benefited the most by these policies which typically they helped to institute. Krugman is most certainly a useful voice for rationalizing these awful ideas and making the problem cumulatively worse and worse. In fact, he provides a clever cover for these policies, doomed to fail at their inception, by making the claim that the policies were 'never big enough to do the job'. He can therefore never be 'wrong' while simultaneously claiming that the policy was always right, just never big enough to achieve its goals. He can also cleverly blame his political opponents for limiting his brilliant recommendations while also saying things which can never be proven nor tested like, "well if we did NONE of this stimulation, then the economy would have completed imploded and we would all be living in mud huts".

    Krugman also likes to point out that the USA can borrow at virtually no cost, which is true currently, but people that listen to Ron Paul or have any sense of history fear that this is unlikely to continue forever. It is the catastrophic outcome of such a rise in borrowing costs that is terrifying to consider. What is worse, every borrowed dollar is generating less and less real growth (or none at all). I don't know the statistics offhand but it is takes more and more dollars borrowed to produce less and less dollar of growth. Meanwhile the promises, entitlements, and spending continue literally unabated. More people receive from the government than those that pay into the system. What are called 'spending cuts' by the government, and like minded economists, are merely reductions in planned increases in spending above and beyond what we are already spending. It is total madness writ large and Krugman is on the forefront which is why he is so heavily criticized. (cont.)

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  54. (cont.) Krugman appears to be mired in his model and frankly his model, no model for that matter, can possibly capture the complexity of the global economy in today's world. I can give you, just as a starting point, more than seven billion reasons why this is the case. I believe most people that listen to Ron Paul recognize this fallacy and scoff at the massaging of statistics and metrics to paint a picture that fits a theory of how the world economy functions.

    WIth all of that said, it seems that the only way forward is to trust in the marketplace versus trusting in technocrats like Krugman and the FRB. The role of the government should only be to provide clear rules and protection against fraud, force, violence etc. Unfortunately our Congress no longer represents such a notion. Most people think the current group, with VERY few exceptions, represent an antagonistic position to this broad based, common interest, and represent highly concentrated interests at a corporate and political level.

    Arguing about minute by minute financial predictions is worthless because financial predictions are generally worthless. That said, with history as a guide, the types of programs, bailouts, and monetizations that have occurred along with the massive borrowing and waste does not indicate a healthy or favorable outcome.

    In response to VY comment about 'serious economists know Ron Paul is a joke' I would just reply that every day, more and more people realize that the big joke are 'serious economists' that think they are dealing with a hard science and 'central planners' that think they know better. This country needs rule of law, not central planning technocrat economists.

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  55. The previous Anonymous contradicts himself. He trusts in the marketplace, which currently is predicting little inflation any time soon, but still believes that Ron Paul is right that hyper inflation is right around the corner. As for Paul's past 'predictions', certainly the prediction that there was a housing market bubble wasn't unique to him. Case/Shiller saw it as well, as did Krugman. The only people that didn't see it coming were disciples of the University of Chicago. All that aside, Wenzel is refuting an argument that Krugman didn't make. Krugman did not argue that there has been no inflation since 1980. He argued that contrary to Wenzel and Paul's prediction, the rate of inflation has not changed much since 2008 when the Fed opened the flood gates. That was the point of the smoothed inflation rates. I don't know if Wenzel doesn't understand this or he does and just refuses to accept that his prediction has proven wrong.

    http://www.econ.yale.edu/~shiller/pubs/p1089.pdf

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  56. Well, it's months, later, and Krugman has mentioned Paul again:

    http://krugman.blogs.nytimes.com/2011/12/14/speaking-of-people-whose-models-have-failed/

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  57. When it comes to economics I would sooner trust an academic with a Nobel Prize in economics than trust a politician like Ron Paul. Ron Paul appears to be a principled politician but the problem is his principles are wrong

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  58. @anonymous (12:16 PM)
    "This country needs rule of law, not central planning technocrat economists."
    Yes God forbid any real economists using REAL data both from history and the present day should have any valid opinions on the macro-economics problems we are facing.
    So, henceforth, economics will be a faith-based science and the tenets of this faith will be decided by good moral Christians who have direct guidance from God Almighty in Austria.
    Winston Churchill was right when he said "You can always count on the Americans to do the right thing...... once they have exhausted every other possibility"

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  59. I came here to say "When it comes to economics I would sooner trust an academic with a Nobel Prize in economics than trust a politician like Ron Paul. Ron Paul appears to be a principled politician but the problem is his principles are wrong" but someone beat me to it.

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  60. In response to your claim that I contradicted myself in the prior post...

    You are confusing current market conditions with predictive ability of the market (just like Krugman). Capital has nowhere to hide at the moment but in the USD as cash or treasuries. This is paying an extraordinary dividend to the USA in very low borrowing costs on massive amounts of debt. Is that what you are referring to when you say the market 'is predicting little inflation anytime soon'? The trouble is when this highly favorable situation ceases. It can happen violently and the outcomes over history have been awful. They are playing with fire. That is Ron Paul's point.

    Krugman WANTED a housing bubble after the dot com crash in order to reinflate the economy. Well he got his wish. Didn't work out so well... Now what? He doesn't want the market to clear... Then he wants a bubble in sovereign debt (spend spend spend inflate inflate inflate) . Well he got his wish.. Well the music is still playing on that one, and could continue for some time I suppose, although the folks in Europe might disagree.. The big question is, when that bubble bursts who bails out the sovereigns? What happens when that bubble bursts? Loss of confidence in the money. That is the nightmare hyperinflation environment... Oh wait, I remember what Krugman wants to do next! He wants us to prepare for an imaginary alien invasion to spur the global economy! You literally can't make this stuff up.. Only Paul K can say these things with a straight face and think it makes sense.

    By the way, if you want to listen to an economist with the nobel prize, give Hayek a try instead.

    Then again, didn't they give Obama a Peace Prize while he simultaneously started a war? I guess it all fits right in with the whole doublespeak nature of our leadership. War is peace. You have to spend money to save money. Blah blah blah

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  61. You seem to think that Austrians pretend to think they can actually control and manage the economy like your Krugman does. They don't. They admit that is a fatal conceit. The best that can be done is to provide the environment for voluntary economic trade to occur while protecting the rights and property of the market participants without using the force of government to confer special benefits on the powerful and well connected. The economy will take care of itself as a self regulating, living, dynamic system. Bad actors would be punished, not rewarded, as Krugman's policies promote. Good behavior will be rewarded. Prices will naturally fall due to productivity gains. When there are shortages or increased demand due to added value, prices will rise and welcome either additional supply or innovation / competition. There will be failures. There will be triumphs. But the most important thing is that CAPITAL will be what drives the world. Not debt fueled, debtor slavery, centrally planned misallocations and artificial booms and busts. Our current system, which Krugman wants to continue to expand, punishes capital and rewards debt. He claims to be for 'the little guy' but he isn't. Debt serfdom is not good for the little guy. Negative interest rates are not good for the little guy. Rising prices year after year are NOT good for the little guy.

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  62. Krugman today:

    "Look, the Austrian/Ron Paul types made some very strong predictions about inflation — and rightly, given their model of how the world works. In their version of reality, it really isn’t possible to triple the monetary base without dire effects on the price level. In my version of reality, of course, that’s not only possible but what the model predicts in a liquidity trap.

    So since we did indeed triple the monetary base with nothing much happening to inflation, the right lesson to draw is that their model is all wrong. Unfortunately, I see no hint that anyone in that camp is prepared to consider that possibility."

    OH SNAP! The Austrians were idiots. Hayek a moron. Schumpeter a lightweight. Keynes was the last great economist!

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  63. The difference between Krugman and all of the other lightweight "conservative" economists, is that Krugman uses data to back up his claims rather than pure ideology. That is why the repeated mantra of the "right": tax cuts increase tax revenue, has proven to be not only factually incorrect, but has resulted in severe budget polices that we are now having to deal with. It's time conservatives stop living in their alternate world of ideology and start living in reality.

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  64. Dear Sir...I am from and living in a emerging country and I would like to share some thoughts about the inflation that is going on all over the emerging countries...It is real and it seems that a major share of the FED money printing has gone all the way through the emerging countries economies...I am sure that the aftermath of the huge "behind the scenes" bailouts performed in the last 3 years(and of course even before we could trace the incredible growing rates of the chinese economy as well) were focused in allowing the big banks FED dealers to have direct investments into the emerging markets as to prop up their insolvent balance sheets and these actions are leading to a HUGE inflation around the globe including some like the following occuring RIGHT now in Brazil
    1-A housing bubble with an average increase of amazing 400%-600% of the newly build housing and office square meter(the least range accounting for the lower middle class and the highest range to the upper class )
    2-an 50% average increase of the food and drugs prices in the last 3 years
    3-cleaning and maintenace products accounting for a 60% increase prices in the retailers
    4-an 70% in the rent prices in the last 3 years
    and the list goes on and on
    So the same incredible inflation explosion is being seen going on in ALL major emerging market countries and DO NOT FOOL yourselves that it is a FED driven
    So the current peripheral inflation is hidden from the american public until INEVITABLY is going to reach the american in a FULL mode
    The INTEREST to acquire a house or condo here are 12.5% annual rates and I could bet with any keynesian economist that this rates are split among the local banks and the american investor banking system and that to me is the necessity to improve the insolvent balance sheets by spreading the inflation outside the USA economy

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  65. Regarding the last commentary by anonymous at 12:46...I am astonished by some of his(her) remarks...it is incredibly NON proven assertion that tax cuts decreases tax revenue ...not the way around..ANY tax implemented by any entity in a free market DISTORTS the INTERACTION among all the agents that are actually producing TANGIBLE GOODS...any third party (non player in the free markets that is moved by political and IMPRODUCTIVE assumptions)is going to disupt any dinamical natural equilibrium and further deveplopments of new forces in the natural environment of this infinite interactive free market agents

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  66. Where is the inflation? One need only read Dec 18 at 10:00 to see that the US is exporting it to the emerging economies. Because the US dollar is the de facto reserve currency, America's inflation problem can be largely hidden from her shores. How does Krugman account for this fact?

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  67. These statists/Krugman trolls or MMT loons are really something to behold. There existence is for entertainment purposes only.

    Hey statists wheres the deflation? 3.5% percent inflation constitutes deflation? who knew?

    Hey statists, why do you think you have superior knowledge to plan an economy and manipulate it to your liking? Where did you get the knowledge from? the "empirical data?" LOL. Hayek and Von Mises evicerated your nonsense decades ago. You dont and cant posses the necessary knowledge and information to "Fix" and economy with some "stimulus" plan.

    Problems that were created by too much spending and debt, are ALWAYS solved by, wait for it MORE SPENDING AND DEBT!!! RIGHT? IF ONLY THE STIMULUS WAS BIGGER!!! LOL

    People are somehow too stupid to solve there own problems on their own in the market place voluntarily but are somehow smart enought to select wise government overseers to "Fix" their problems. Lets just hope these wise overseers believe in the benevolent power of government and are not some evil stupid "conservatives."

    Lets hope they are "progressives" and keynesians and MMT'ers. Those folks "get it" right? LOL

    People in the free market are stupid and the people in government are angels. The "empirical evidence backs this up right?

    (Because of course, by believing government can solve problems, makes it true!)


    If only the right planners were in charge, the economy would be all better by now. If only we had borrowed and spent even more money on government boondoggles. LOL give me a break

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