Monday, December 27, 2010

Krugman Just Gets Silly

Paul Krugman is out with yet another post, defending his absurd position that rising commodity prices will not eventually translate into rising consumer prices.

There are a few things to note here. First, it appears Krugman has completely ditched his disinflation/deflation talk. He is no longer talking that doozy of a theory. He has moved on to say, Well, it is only commodity prices that are climbing.

The man is becoming a caricature of himself, with each additional post. He runs a volatility chart in an attempt to somehow prove his point, which I guess is that there will be no price increases at the consumer level :

Who the hell ever said that commodities weren't volatile? In fact, if Krugman understood Austrian Business Cycle Theory he would understand that such commodities as copper, nickel, oil and the like are volatile because of the demand for them in the capital goods sector. As Ersan Bocutoglu and Aykut Ekinci, at the current core of Austrian Economic thinking,  put it:

The process [of the current crisis] started with the credit-expansion policy, which caused considerable increases not only in property prices but also in capital goods and stock prices. Commodity price indexes such as energy, industrial-inputs, metals, and the American consumer price index (CPI)... In order to facilitate comparison, the indexes under consideration were arranged on the base year 2001 (2001=100).

From 2001 to 2007, the CPI, and industrial-inputs, energy, and metal prices increased by about 19%, 113%, 117% and 226% respectively. In the same period, an increase of more than 250% occurred in the Global Dow Jones.

The fact that CPI is not acting as a leading indicator during business cycles is well illustrated by the trends given..... Therefore, it would be more appropriate to take real-estate, industrial-inputs, energy, and metal prices as indicators of economic risk.

Bocutoglu and Ekinci don't explain this, but the reason the CPI is less volatile is because the impact of Federal Reserve money printing, both when there is expansion and contraction of the printing, is most significant in the capital goods sector, including on copper,energy etc.

The money flow into the consumer sector is later and does not have the same kind of outflow (Thus, less volatile price drops)as does the capital goods sector during a halt in Fed printing. Indeed, during a halt in Fed printing, a new consumption/capital structure is forming in favor of consumption, pushing even more money flow towards the consumer sector, keeping it from declining as much, and becoming as volatile as the capital goods sector does. Krugman doesn't understand this.

Further, he doesn't get (or won't admit) that Fed printing is causing some of the increase in the commodity prices and that this money flow will find its way to the consumer sector. So overall his chart is a silly one to run,and  it is obfuscating. Here is what has really been going on with commodity prices over roughly the same period as his "volatility" chart:

Here's the CPI over the same period.

The two charts do indeed trend the same, the commodities index just trends with much greater extremes. Krugman is simply being very deceptive in his post. He will get more deceptive over coming months as he is going to have to explain away his cluster of botched calls. Not only is he going to be wrong about consumer price inflation, but he is going to be wrong in his forecast of terrible unemployment and in his forecast of an overall anemic economy. The economy is going to "improve" in a manipulated way, thanks to Bernanke, much quicker than any Keynesians expect, and his call for more stimulus, that he made just a week ago on the Rachel Maddow Show, will make even more people wonder who the hell they are giving Nobel Prizes to these days.

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