## Monday, December 20, 2010

### Bizarre Post from Krugman

I don't mean to turn EPJ into "All Paul Krugman News, All the Time", but his posts, which reach a huge audience, are getting increasingly bizarre.

In his most recent post, here writes only this:

Base Money and Inflation

For those who think that it matters whether you use core or headline inflation
He then posts the chart of the monetary base, with its huge spike because of a trillion dollars in excess reserves that flowed into the base when Bernanke was conducting QE1.

What's even more bizarre is that Krugman mentions core and headline inflation, but only charts headline. But let's forget this for a moment and consider the chart.

I'm thinking that anyone with a seventh or eighth grade math comprehension level would understand that if you throw on a chart the growth level of something that is growing at an annual rate of over 100%, and also put on the chart two items where one may be growing at 2% and the other at 5%,  the change in growth of the 100% item is going to dwarf the 3% and 5% growth rates. Yet if you chart the 3% and 5% growth rates on a separate chart, the difference between the two growth rates will be readily apparent.

Thus, this chart is absurd for the point Krugman is trying to make about the relative growth rates of core and headline inflation.  What's the monetary base doing on a chart for such an analysis? Further, since most of the growth in the monetary base was excess reserves, i.e., money that is not in the economy bidding up goods and services, it has nothing to do with price inflation.

In other words, a conversation between you and Krugman would go something like this:

YOU: Boy, in the grocery store, prices seem to be going up close to 10% a year.

KRUGMAN: That's no big deal, there's something called excess reserves which are not in the economy that are growing by 100%.
Either Krugman is experiencing serious deterioration of the mind, or he is attempting to be deceptive to those with a 4th or 5th grade math comprehension level.

Truly bizarre.

#### 1 comment:

1. Speaking of excess reserves, did you notice that 92% of the \$48.5 billion that was printed during the last reserve window (Dec 2-15) was put back to the Fed in excess reserves? During the same period, the Fed Funds rate dropped to 0.16% (though it subsequently recovered to 0.20%). I would say something big happened that caused banks to adopt a risk averse posture, which may or may not have subsided by now.