Sunday, December 5, 2010

ALERT: Krugman in Full Panic

After 19 instances of price inflation all over the place, Paul Krugman has found two charts which he claims demonstrate disinflation in the economy.

The first chart is of "Core" CPI, which excludes food and energy, and which was designed by Richard Nixon  as an index to fool "the people".  You know Krugman is desperate when he relies on a Nixon indicator. This one, though, in due time will also turn positive on inflation.

Chart 2 is where Krugman really displays his desperation and his ignorance of business cycle theory. He shows us a chart of slowing wage increases. But unemployment (and therefore wages) lags a turnaround in the economy. If Krugman understood Austrian business cycle theory, he would understand that the average worker gets screwed during an inflationary period, as the money flows first to the capital goods sector. That is why the stock market turns before wages.

The unemployment lag, and thus the slow recovery in wages, should not be a surprise to Krugman. It is basic. It is certainly (LOL) not an indicator that disinflation is on the way and spreading through the economy.This is what the Conference Board writes:

Below is a list of the seven components of the Composite Index of Lagging Indicators, according to the board's Business Cycle Indicators....Average duration of unemployment - This component represents the average number of weeks an unemployed individual has been out of work. The value of this component is inverted to indicate a lower reading during a recession and a higher reading during an expansion. The measure of duration of unemployment is a lagging indicator...
Even the brokerage firm Charles Schwab understands wages are a lagging indicator:
The employment cost index (ECI) is a wage-inflation indicator produced quarterly by the Bureau of Labor Statistics (BLS) measuring wages, salaries and benefits. It records changes in compensation costs for civilian workers, which include nonfarm private industry, and state and local government employees...

Note: the ECI is a lagging indicator...decreases in the ECI are usually the result of too much economic restraint several months can take roughly six months for economic growth to begin to increase and another six months for the ECI to begin to rise.
Bottom line: Krugman is a desparate man. For him to pull out a Nixon designed price indicator and a lagging indicator to prove his point, it's clear he is cornered.

Starting with this post, I am adding a new label "Krugman Cornered". I will go back and add other posts to the label that show quotes from Krugman where he is cornered talking either about disinflation or deflation.

This guy needs to be nailed in real time.

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